Operations Focused Training Financial Management

PARTICIPANTS’ HANDBOOK
Index
SECTION - 01 - INTRODUCTION TO FINANCIAL MANAGEMENT
SECTION - 02 – COST PRINCIPLES
OPERATIONS FOCUSED TRAINING

SECTION – 03 – BUDETING AND PLANNING
SECTION - 04 – BOOK KEEPING FOR NGOS
SECTION - 05 – CASH MANAGEMENT
SECTION - 06 – PAYROLL MANAGEMENT
SECTION - 07 – PROJECT FINANCIAL REPORTING
FINANCIAL MANAGEMENT
SECTION - 08 – FINANCIAL AUDITS
SECTION - 09 – AWARD CLOSE-OUTS
SECTION - 10 – TAXATION AND FINANCIAL SUSTAINABILITY
April 2014
Disclaimer
This handbook was made possible with support from the American people through the U.S. Agency
for International Development (USAID). The contents are the sole responsibility of Trust for
Democratic Education and Accountability and do not necessarily reflect the opinion of USAID or
the U.S. Government.
Table of Contents
Session # Session title Page no
1 Introduction to Financial Management ------------------------------------- 1
2 Cost principles ---------------------------------------------------------------------- 23
3 Budgeting and Planning ---------------------------------------------------------- 68
4 Accounting & Reporting system ---------------------------------------------- 74
5 Cash management system ------------------------------------------------------ 95
6 Payroll management -------------------------------------------------------------- 110
7 Financial Audits --------------------------------------------------------------------- 138
8 Project Closeouts------------------------------------------------------------------- 180
9 Financial Sustainability of CSOs------------------------------------------------ 192
10 Internal Controls and Taxation ------------------------------------------------ 195

OFT MANUAL: FM Introduction to Financial Management SECTION – 1
1.1 WHAT IS FINANCIAL MANAGEMENT?
"Financial management is the area of business management, devoted to a judicious use of capital and a careful
selection of sources of capital, in order to enable a spending unit to move in the direction of reaching its
goals."
Financial management is that function in an organization that is concerned with the raising and allocation of
resources within that organization in order to attain its goals. In financial management, not only must
resources be acquired and allocated within the organization for the day-to-day use, they must also be
efficiently and prudently used. The organization must not only ensure that this happens, but it should
endeavor to prove that it happens.
Financial Management brings together
 Planning,
 Budgeting,
 Accounting,
 Financial reporting,
 Internal control including internal audit,
 External audit,
 Procurement,
 Disbursement of funds
 And the physical performance of the program,
with the main aim of managing resources efficiently and achieving pre-determined objectives. Sound
financial management is, therefore, a critical input for decision-making and program success.
Good financial management can only be achieved if each one of these activities is operating well and is fully
understood by the management committee, especially the Top Tier Management.
Accurate and timely financial information provides a basis for better decisions about physical
progress of the program, availability of funds, reducing delays and bottlenecks if noticed.
The financial management system should produce timely, relevant and reliable financial information
that would allow program managers and State/Central governments to plan and implement the USAID
program, monitor compliance with agreed procedures and appraise progress towards its objectives.
Relationship between proper financial management and the general goals of organization:
 Finances enable an organization to continue existing.

 Finances facilitate the organization acquire assets to use in its goals/objectives.
 Financial reward is one of the motivating factors to employees.
 Finances help the organization to meet the needs of its clients.
 Finances help organization to gain the confidence of others.
 Finances help organizations to deliver to society and on government requirements.
1
Financial management serves organizational goals in the following ways:
 Obtain funding for programs.

 Have contented employees. This depends on the wage/salary level and other benefits provided by the
organization to its employees.
 Satisfy clients by the quality of service rendered to them.
 Fairly deal with suppliers e.g. creditors and financial institutions by paying the amounts due to them as
soon as they are due.
 Improve social welfare. All the resources of the organization must be optimally allocated such that
they will lead to the best possible social impact.
 Act according to the law and government requirements. It is a duty of an organization to follow all
labor laws and financial management regulations in order to achieve economic stability and civil
order.
The goals of financial management can conflict with organizational goals when:
 Heading for a stronger assets position may mean reducing employee welfare or delivering less service
to clients.
 Satisfying clients may require more expenditure, leaving less money available for improving the asset
position and employee welfare.
 Quick payments to suppliers sometimes may lead to liquidity problems, which affect employees and
may lead to failure in satisfying clients.
 Obeying all the laws, especially tax laws, may oppress employees.
1.2 OVER VIEW OF FINANCIAL MANAGEMENT SYSTEM:
Financial management is more than just keeping accurate accounting records. It also involves planning,
controlling and monitoring financial resources to achieve organizational objectives. At a minimum, a financial
management system should ensure that costs are properly categorized, tracked and charged to the
appropriate accounts, and that managers are able to report financial information accurately to the Board and
to donors.
A good financial management system makes it easier to be accountable to donors and project beneficiaries,
thereby enhancing their respect and confidence in the organization. This, in turn, helps an NGO be more
competitive and can increase its chances of maintaining long-term financial health. This section introduces the
key elements of a comprehensive financial management system and ways in which an NGO can strengthen its
capacity in this critical area.
WHAT DOES GOOD FINANCIAL MANAGEMENT INVOLVE?
Good financial management involves planning, organizing, controlling and monitoring resources so
that your organization can achieve its objectives and fulfill its commitments to beneficiaries, donors and other
stakeholders.
2
Four Key Pillars of Financial Management
Although no one model of financial management fits every organization, the following components are
essential to good financial management:
 Planning looks ahead to prepare for the future, such as developing budgets to cover activities of a
program or the entire organization for a year or a longer period.
 Organizing clarifies who does what, why, when and how.
 Controlling establishes systems and procedures, checks and balances, to make sure that the
financial resources of the organization are properly handled and that risks are managed.
 Monitoring compares plans with actual performance to identify strengths and weaknesses in
planning and implementation and adjust as necessary.
1.3 COMPONENTS OF A GOOD FINANCIAL MANAGEMENT SYSTEM:
Good financial management requires more than simply keeping accurate accounting records. Many NGOs
may have only an accounting or bookkeeping system rather than a financial management system. Accounting
is a subset of financial management. A financial management system encompasses both accounting systems
and administrative systems.
1) Accounting systems encompass the methods, procedures and controls established to gather, record,
classify, analyze, summarize, interpret and present accurate and timely financial data.
2) Administrative systems provide the framework for handling procurement, travel, inventory, facilities
and personnel matters such as payroll and benefits.
ACCOUNTING SYSTEM:
How accounting can help organizations achieve their goals:
 It provides figures for planning compromise positions.

 It facilitates control.
 It provides information on the financial standing.
 It provides information on the funding trends.
 It provides information on expenditure trends.
A practical accounting system for an organization typically consists of the following:
i. The Funding Agreement
The funding agreement between the donor and the organization outlines all aspects regarding the project and
should include the following:
 activities to achieve the deliverables

 funding of the project
3
 reporting on activities
- narrative report
- financial report
- periods of reporting
 management of funding and procurement of goods
 Stipulations in the budget regarding how the funding is to be applied.
ii. The Budget
The budget includes all planned activities listed by type of activity. It is a financial framework listing all
activities and deliverables as stipulated in the agreement. Each line item in the budget indicates the costs
which may be incurred for the specific activity (for example, the number of workshops to be presented, the
number of persons to attend, the venue rental costs, the presenter costs). Travelling costs and per diems are
either provided for in a separate line item or aligned with specific activities. Fees per kilometer and per diems
applicable are listed. Provision for administrative costs may include:
 bookkeeping fees
 audit fees
 telephone costs
 rental
 stationery
 other office costs
- Office costs may be subdivided into specific costs or may be provided for as a lump-sum for
overhead costs for the total project.
- If divided into specific costs, actual costs are claimed per month as they occur -
according to specification.
- If specified as a lump sum, the total overhead provision may be transferred to -a
dedicated account from which running costs are paid monthly in total. The organization
can transfer the overhead funds to a dedicated account named, for example, ‘own funds’,
pooling overhead funds from different projects. When transferring the overhead costs to
an ‘own funds’ account, that sum is entered as an expense in the records of the project in
the month of transfer in one sum. The organization’s running costs which are not project-specific
may be paid from the ‘own funds’ account. Funds remaining in this account may also be
used to bridge periods when projects have been completed and new projects have not yet
commenced, but running costs like rent, telephone and insurance still have to be paid by the
organization.
If, during the implementation of the agreement, it is found that certain reasonable costs could exceed the
relevant budget line, an agreement has to be reached with the donor to re-adjust the costs accordingly and
to rebalance the budget by reducing other line items. This should be done before overspending on a line item
actually occurs. Salaries and fees are generally not adjustable during the course of an agreement. For the
duration of the project a summary of expenses is drawn up and is updated monthly, indicating monthly
4
expenses, total expenditure to date and the remainder of funds per line item. This serves as a control
instrument for both the manager of the organization and the project program managers.
The following expenses are usually not allowed by donors:
 lobbying – includes direct legislative lobbying and grassroots lobbying;
 fund-raising – includes costs of organized fund-raising, endowment drives, solicitation of gifts and
bequests and similar expenses incurred solely to raise capital or obtain contributions;
 bad debts – any losses arising from uncollected accounts and other claims and related costs;
 contingencies – contributions to a contingency reserve or any similar provision for unforeseen
events;
 fines and penalties – resulting from violations of, or failure to comply with state and local laws
and regulations;
 losses on other awards – any excess of costs over the grant budget is not allowable;
 unnecessary travel costs – for example, when travelling by air, only economy class is allowable;
 contributions and donations by the organization to others;
 certain depreciation or use allowances on buildings and equipment purchased with
the donor’s funding;
 entertainment – costs for amusement, social activities, ceremonials, hospitality and activities
relating thereto, such as meals, lodging, rentals, alcoholic drinks, transportation and gratuities are
unallowable;
 Interest – costs incurred for interest on borrowed capital are unallowable.
In addition, an NGO will generally have to submit a reconciliation of funds received to its donors
at pre-arranged time intervals so that control can be kept of how much of a grant advance has
been used, whether the NGO would need a subsequent advance and how much interest (which often has to
be returned to the donor) any advanced funds have accumulated. Although the requirements of various
donors and the forms to be used in this regard may differ.
iii. Bank Accounts
The choice of a bank will depend on the facilities available at the grantee’s location. The decision
should also be based on the willingness of the bank to pay interest on a current account. If the
agreement stipulates that interest earned on the funds of the project is refundable to the donor, a
dedicated bank account must be opened to accommodate that agreement. Management decides who is
responsible for the approval of payments, the signing of cheques, electronic transfers, and the handling of
petty cash:
 Cheques: A single signatory signs or two signatories co-sign cheques according to a resolution of
the Board of Directors of the organization. The cheque plus a cheque requisition form is completed
by the bookkeeper and presented to the signatory/ies, together with the approved invoice for
payment.
 Electronic transfers: The same guidelines as for cheques apply. The transfer request is signed by
one or two signatories, as has been determined. A designated person does the actual electronic
5
transfers. The transfer documentation is signed by the signatories who approved the transaction, or
by other designated persons.
Organizations must provide safeguards for all grant property, whether cash or other assets, and assure that it
is used solely for authorized purposes. Control will be enhanced if the duties of the members of the
organization are divided so that no one person handles all aspects of a transaction from beginning
to end. Although a complete separation of functions may not be feasible for a small organization, some
measure of effective control may be obtained by planning the assignment of duties carefully. Many of the
most effective techniques for providing internal control are very simple. Within an organization, the same
person should therefore not be performing the following duties:
 preparation of bank reconciliations and approval thereof;

 preparation of requisitions and approval of expenses;
 Accounting entries and approval of expense reports.
Where required by a donor agency, a separate bank account should be opened for the specific use of the
donor’s approved budget and activities. Transfers between donor bank accounts are NEVER allowed.
However, if necessary, funds may be transferred from the general account to a donor account when funds
run low or funds are not transferred in time.
Bank reconciliations should be conducted on a monthly basis by the financial officer and approved by
the Executive Director.
iv. Petty Cash
Depending on the type of activities, cash payments sometimes cannot be avoided. In this case a petty cash
structure must be put in place. One person only (supervised by, for example, the financial controller) should
have control over cash funds, have sole access to the cash, and assume responsibility for the reconciliation
of the petty cash vouchers and the remaining cash funds. If the financial controller is in charge of petty
cash, another person is designated to supervise the petty cash operation at intervals. The handler of petty
cash is responsible for the reconciliation of the petty cash funds and is liable for any shortages of cash. The
key of the cash box remains with the person handling petty cash at all times.
 Cash is kept in a cash box in a secure, lockable cupboard or a safe.

 For payouts from petty cash, a petty cash request form must be completed.
 The recipient of the cash signs the petty cash request form when receiving the cash.
 The transaction is finalized when proof of purchase (invoice or till slip) is handed to the keeper of the
petty cash and any surplus cash has been returned.
 The final amount paid, and the funds returned to petty cash, are noted on the petty cash request
form.
v. Procurement
An organization’s procurement policy should be based on the principle of assuring the most cost efficient
and rational use of resources for goods or services that will best serve the organization both at the
6
present and in the long term. Organizations should follow a multi-quote system procurement policy for the
supply of both products and services. This system of procurement should not preclude exercising good
judgment in assessing the merits of the quotations received. This system of procurement should not
result in a lowering of minimum standards or norms as required by the specific purchase in assessing the
quotations received. In instances where long-term business relations have developed with suppliers to the
extent of sole-sourcing, the relationship will be subject to market-related standards and competitive review.
In instances where procurement occurs within monopolistic industries, such procurement will be exercised
with good judgment. This does not preclude procurement of services beyond country borders if
necessary and to the benefit of the organization. All assets are to be reflected on the organization’s
fixed asset register. Asset disposal shall occur in consultation with the relevant donor.
Different approaches should apply to the purchase of non-expendable items, or fixed assets (such as
computers, cars, printers and copying machines), on the one hand, and general purchases (such as office
stationery) on the other. Non-expendable items are those with a useful life span of more than one year; they
are permanent in nature and include (but are not limited to) office furniture, computer equipment,
photocopiers and electronic equipment.
In the case of non-expendable items, or fixed assets, such as computers, printers and photocopying
machines:
 the purchase must be provided for by the agreement and approved by the Executive Director
 three quotations must be obtained if the purchase value of a single item exceeds N$1 000, or as
specified by the agreement
 the Executive Director must confirm the choice (made from the quotations) of item to be purchased
by signing the quotation before the item is actually ordered.
A fixed asset register, listing the following details relating to non-expendable equipment, must be
maintained:
 type of equipment
 serial number
 date purchased
 cost of purchase
 current cost (depreciated value)
 Location (office assigned to).
All items removed from the asset register should be accounted for by the Executive Director. The asset
register should be updated as soon as new items are purchased or acquired, but at least once a year.
In the case of general purchases (fuel, stationery, refreshments, cleaning material):
 a purchase order is completed before the item is purchased;

 the delivery note, confirming receipt of goods, is signed by the person of the organization receiving
the goods;
7
 the invoice is approved by the Executive Director for payment and signed, along with the payment
request form and he or she indicates the relevant budget line item;
 the payment is made by cheque or electronic transfer;
 low cost items such as refreshments and cleaning materials are mainly purchased via petty cash.
Non-expendable items should not be removed from the office building unless for purposes relating to a
program. In such a case, prior authorization must be given by the Executive Director. A prescribed consent
form must be completed prior to the removal of the item from the office building. If a staff member removes
a non-expendable item from the office without prior consent and it is damaged or stolen, the staff member
will take responsibility for the damage or loss of property. A policy does not normally allow for the lending
out any non-expendable items to a person or organization. However, the Executive Director may use his or
her discretion if the need arises for lending out specific items. In such cases, the lender will take full
responsibility for damages to or theft of the property.
vi. Recording Of Project Activities
Activities should be executed as agreed upon in the agreement with the donor. Records and proof per
activity must be kept. Reporting is usually done as follows:
Narrative reporting on activities
The program manager summarizes the activity, supported by the following documentation, also reporting on
outcomes, challenges incurred and results achieved, if measurable:
 an attendance register, signed by all participants of workshops, conferences and seminars;

 the date, place, venue and subject of the seminar or workshop and group addressed (recorded on
the attendance register);
 evaluation forms, completed at the closure of the event by the participants;
 Questions regarding the presentation and the content of the workshop, completed anonymously by
the participants of the workshop (listed on the evaluation document).
Financial reporting on activities
All costs incurred for the presentation of an activity are summarized in a financial report:
 venue costs – rental of hall

 presenter fee – external consultant
 travelling expenses – per kilometer fees for presenter or participants from remote locations
 presentation materials and stationery used during the workshop
 refreshments consumed during the workshop
 daily allowances (per diems) – only applicable for overnight absence from home.
When planning an activity, expenses must be aligned with the budget.
vii. Payments
8
Payments are usually made electronically by internet banking, by cheque or in cash. The procedures
for paying electronically by internet banking or by cheque are as follows:
 payment of an invoice is authorized by the manager’s signature and an indication of the budget line
item on the invoice
 the bookkeeper completes the cheque requisition form, writes out the cheque and attaches the
cheque and the invoice to the requisition form
 each cheque should be secured with the words ‘Not negotiable’, written out or stamped on the top
part of the cheque
 the signatories sign the cheque as well as the cheque requisition form

 the cheque number, the date of the cheque and the project which funds the payment are clearly
written on the invoice in order to prevent double payment of invoices
 Cash cheques are issued only to replenish petty cash and may not be secured with the ‘Not
negotiable’ note (a cheque which is marked ‘Not negotiable’ has to be paid into a bank account).
The procedure for payment in cash is as follows:
 each payment from petty cash is recorded on a cash requisition form

 the person in charge of the petty cash completes a cash requisition, noting the amount advanced
 the recipient of the cash signs in acknowledgement of receipt of the cash advance after the purchase
has been made, the proof of payment (invoice or till slip) and the
 remaining cash funds are returned to the petty cash holder
 the actual costs, as well as the funds returned are recorded, and the requisition form is signed by the
petty cash holder and the purchaser to indicate agreement regarding the conclusion of the
transaction
 The proof of payment is attached to the petty cash requisition form.
viii. Bank Transactions – Cash Book
Bank transactions may consist of cheques issued, electronic banking transactions, debit orders, interest
received and bank charges. Banks issue bank statements on a monthly basis or as agreed upon with the bank.
All transactions are recorded on a schedule indicating:
 opening balance at the beginning of the month

 all cheques issued during the month, listed in numerical order
 all e-banking transactions, listed in chronological order
 debit orders paid by the bank
 bank charges
 Balance at the end of the month.
The balance reflected in the cash book is reconciled monthly with the balance showing in the bank statement.
Differences between the two balances are reconciled by listing the outstanding items between the two
balances. In the cash book, all payments are subdivided (if applicable) to the line item columns of the projects’
9
budget line items, and then summarized on the cash book schedule, adding up to total expenses of the month
paid from the bank account.
On the cash book schedule, petty cash expenses are also listed and added to the columns for line items.
These show movement in funds available in both the bank account and the petty cash.
The cash book summarizes movement in funds payable and receivable, and income received from donors.
ix. Cash Transactions – Petty Cash
All transactions are recorded on a schedule indicating:
 opening balance at beginning of the month

 cash received
 Payments made from petty cash.
No petty cash transaction should be left incomplete at the end of each month. The closing balance at the end
of the month must be reconciled with the cash available. Any shortfall is refunded to the petty cash by the
handler of the petty cash from his or her own pocket.
x. Monthly Summaries Of Expenses
On this schedule all expenses are recorded for each budget line item, per month. In one column the
budget according to the agreement is listed. In another column the differences between actual costs to date
and the budget are indicated, appearing as under budget or over budget. This schedule is an important
instrument to keep track of the progress of spending on a funding agreement.
xi. Trial Balance
The trial balance lists all general ledger accounts. The totals of the debit and the credit balances should be
equal, proving that debit and credit entries were posted equally and are balancing. This does not prove that
costs have been allocated correctly.
xii. Balance Sheet And Income Statement
The balance sheet and income and expenditure statement are extracted from the trial balance. The income
and expenditure statement includes all monies the organization has earned or received and balances
this against how much has been spent. Essentially, the statement presents total income received and the
nature thereof, as well as the costs and expenses charged against this income. For an NGO this statement
typically reflects funding sources compared against program expenses, administrative costs, and other
operating commitments. Revenues and expenses are further categorized in the income statement by
the donor restrictions on the funds received and expended.
Whereas the income statement depicts the overall status of the organization’s surplus or deficits by looking
at income and expenses over a period of time, the balance sheet depicts the overall status of the
organization’s finances at a fixed point in time – usually at the end of its financial year. All assets are added
and all liabilities subtracted to compute the organization’s overall net worth.
10
xiii. Audited Annual Financial Statements
Grantees are expected to maintain a state of audit readiness. This means that financial and program related
records relating to their grants must be readily accessible for audit. Failure to provide the auditor
with reliable documentation could lead to questioned costs and possibly result in cost disallowances.
After the end of each financial year an annual audit must be performed by accredited auditors. Each donor is
supplied with a copy of the audited financial statements. Donors often expect audited financial reports on
their specific funding. This has to be agreed upon with the auditors at the start of the audit. The total period
of the agreement with the donor has to be covered by audited financial statements. This specific
reporting to a donor could span the audit reports of several financial years of the organization, depending on
the total period covered by the agreement.
An external audit is an independent report that covers:
 how much money the organization has received and spent in the financial year, and
 what the money was used for;
 whether the money has been spent in accordance with the constitution of the organization, board
decisions and donor requirements;
 whether the accounts (the bookkeeping system) have been properly and honestly kept;
 the value of the organization’s assets;
 How the financial record-keeping system could be improved.
It is also possible to perform an internal audit for your own purposes. This can be done by someone inside
the organization.
The person who performs the external audit (the auditor) must not be actively involved in the
organization, and should not be a relative or close associate of anyone actively involved in it. In some
organizations, it is a government or donor requirement that the auditor be formally qualified and registered.
In others, it is sufficient if the audit is performed by someone who is competent and not directly involved
with the organization.
The auditor is usually formally appointed at the organization’s annual general meeting. The auditor can only
be changed by a formal resolution at an official board meeting. Donors usually want to know why you are
changing your auditor. In many countries there are strict legal guidelines stating who can act as an auditor,
often linked to the size of the organization. As well as auditing the annual accounts, the auditor is usually
available during the year to provide support and advice.
The audit is usually done as soon as possible after the close of the organization’s financial year. In
preparation of the audit the following documents should be ready:
 a copy of the organization’s constitution

 copies of contracts, agreements, or letters setting out the conditions of grants,
 donations or other income received for specific purposes
 copies of budgets for ongoing work or special projects
 copies of grant application forms
 copies of the minutes of board meetings
11
 income and expenditure analysis records

 supporting documentation for income
 receipt books if receipts for money received are issued
 petty cash analysis records
 supporting documentation for petty cash records
 bank statements for the year
 bank reconciliations for the year
 cheque stubs (counterfoils) for all cheque books used during the year, and the one currently in use if
it was used for the year under audit
 cheques returned to the organization by the bank once they have been cleared
 all deposit book records
 a list of creditors (everyone to whom the organization owed money) at the end of the financial year
 a list of debtors (everyone by whom the organization was owed money) at the end of the financial
year
 a list of creditors and debtors from the end of the previous financial year
 records of statutory payments made, particularly on staff salaries
 Details of all assets.
The auditor may also ask to see:
 a list of accruals – income the organization has received for goods or services it has not yet provided;
 a list of pre-payments – expenditure the organization has made for goods or services it has not yet
received;
 List of accruals and pre-payments from the end of the previous financial year.
 Other documents the auditor may need or that will help the auditor include:
- vehicle log books
- value added tax (VAT) records
- tax records
When the audit is almost complete, the auditor will list issues that have not been fully resolved during the
audit. The auditor will ask management to clarify these issues; if unresolved issues cannot be clarified,
the auditor will mention them in the audit report. Such a circumstance, should it arise, is a very serious
matter.
At the end of the audit, the auditor usually draws up a set of draft annual accounts based on the information
reviewed. He or she will include a record of income and expenditure actually received and spent, possibly
with adjustments for creditors, debtors, accruals, pre-payments and depreciation of equipment or vehicles.
There may also be a draft balance sheet showing the financial position of the organization on the last day of
the financial year. The auditor will include a statement saying that the accounts have been drawn up in
accordance with certain standards, based on information provided by the organization. The statement usually
says that, in the auditor’s opinion, the accounts are an accurate and honest statement of the organization’s
financial dealings and situation for the financial year in question. A good auditor will recommend ways to
improve the organization’s financial systems and procedures. The auditor’s advice should always be taken
12
seriously. Such advice is usually given in a management letter. This is a very useful document that should be
reviewed, along with the accounts, by the board. It may even be shared with donors. The idea is to improve
the financial control and accountability practices of your organization. The Executive Director should report
regularly to the board on how the recommendations of the auditor are being followed up. The draft audited
statements should be checked by the Executive Director and then submitted to the board for approval and
signing. When the accounts have been signed by board representatives, they are no longer draft accounts,
and become final accounts.
The accounts should not be signed by any person who does not understand them. If anything is unclear, the
auditor may be asked for clarifications; alternatively, he or she may be requested to attend the meeting at
which the board discusses the accounts.
An NGO’s Executive Director, who has the final responsibility and is accountable for all funding,
needs to ensure that, when going over the audited statements, he or she is able to answer the
following questions:
 How do the figures for income and expenditure compare with the actual expenditure for the
previous year (which will be shown)?
 How do they compare with the budget for the year?
 Why have there been substantial increases and/or decreases on certain items?
 Have all items of expenditure been included? Are they all justified?
 Has the audit fee been included?
 How does this balance sheet compare with the previous one? Is the organization in a better or worse
position financially than it was last year?
 How do the total current assets compare with the total current liabilities?
 Is any deficit in the year being audited covered by a surplus from previous years?
 Even though previous years’ surpluses are part of the accumulated fund or equivalent item, if there is
a deficit, how will a similar situation be avoided in this year?
 Are there any large sums of money owing to the organization? If so, what steps could be taken to
retrieve the outstanding payments?
 Where are the financial reserves of the organization invested, and are they earning a reasonable
income? Is the investment in line with the policies of the organization and are donors happy with the
investment policy?
 Does the audit expose any irregularities or problems?
 Do we need to change our financial record-keeping system in any way, and if so, how?
 What does the audit tell us about our financial strategy of last year?
ADMINISTRATIVE AND INTERNAL CONTROL MECHANISM
OMB 122 defines Internal Control as:
Internal control means a process, affected by an entity's management and other personnel, designed to
provide reasonable assurance regarding the achievement of objectives in the following categories:
(1) Effectiveness and efficiency of operations;
13
(2) Reliability of financial reporting; and
(3) Compliance with applicable laws and regulations.
All staff members, program beneficiaries, volunteers and board members generally have a responsibility to
prevent financial mismanagement. It is therefore imperative to have internal financial control mechanisms
and policies in place.
Internal accounting control comprises a series of procedures designed to promote and protect sound
management practices, both general and financial. By following internal accounting control procedures, an
organization will significantly increase the likelihood that:
 financial information is reliable, so that managers and the Board can depend on accurate information
to make decisions,
 assets and records of the organization are not stolen, misused or accidentally destroyed,
 the organization’s policies are followed,
 Government regulations are complied with.
The first step in developing an effective internal accounting control system is to identify those areas where
abuses or errors are likely to occur. The following areas and objectives, which will be discussed in more
detail in the following section of this session, need to be addressed through an effective internal accounting
control system:
 cash receipts – to ensure that all cash intended for the organization is received, promptly
deposited, properly recorded, reconciled and kept under adequate security,
 cash disbursements – to ensure that cash is disbursed only upon proper authorization of
management, for valid business purposes and that all disbursements are properly recorded,
 petty cash – to ensure that petty cash and other working funds are disbursed only for proper
purposes, are adequately safeguarded and properly recorded,
 payroll – to ensure that payroll disbursements are made only upon proper authorization to
bona fide employees, that payroll disbursements are properly recorded, and that the
organization is compliant with related legal requirements (such as payroll tax deposits),
 grants, gifts, and bequests – to ensure that all grants, gifts, and bequests are received and
properly recorded and that compliance with the terms of any related restriction is adequately
monitored,
 fixed assets – to ensure that fixed assets are acquired and disposed of only upon proper
authorization, are adequately safeguarded and are properly recorded.
Additional internal controls are also required to ensure proper recording of donated materials, pledges and
other revenues, accurate, timely financial reports and information returns and compliance with other
government regulations.
Achieving these objectives requires that your organization clearly states procedures for handling each
area, including a system of checks and balances in which no financial transaction is handled by only one
person from beginning to end. This principle, called segregation of duties, is central to an effective internal
controls system. Even in a small organization, duties may be divided up between paid staff and
14
volunteers to reduce the opportunity for error and wrongdoing. For example, in a small organization, the
Executive Director might approve payments and sign checks prepared by the bookkeeper or office manager.
The board treasurer might then review disbursements with accompanying documentation each month,
prepare the bank reconciliation, and review cancelled cheques.
The board and the Executive Director share the responsibility for setting the tone and standard of
accountability and conscientiousness regarding the organization’s assets and responsibilities. The board,
usually through the work of the finance committee, fulfills that responsibility in part by approving many
aspects of the internal control accounting system.
The policies and procedures for handling financial transactions are best recorded in an accounting
procedures manual describing the administrative tasks and identifying the person responsible for each task.
The manual does not have to be a formal document; it can be a simple description of how
functions such as paying bills, depositing cash and transferring money between funds are handled. As you
start to document these procedures, even in simple memo form, the memos themselves can be kept
together to form a very basic accounting procedures manual. Writing or revising an accounting
procedures manual provides a good opportunity to ensure that adequate controls are in place; additionally,
such a manual helps to facilitate a smooth turnover in financial staff.
The Executive Director is commonly responsible for overseeing the day-to-day implementation of these
policies and procedures. Due to the number of detailed requirements involved when an organization receives
funding from a given donor, there should be one person in the organization (possibly the grant administrator)
with the responsibility of understanding and monitoring the specific regulations, requirements and compliance
factors specific to that donor.
As an organization changes and matures and funding and programs change, you will periodically need to
review the internal accounting control system which was established and to modify it to make allowance for
new circumstances (bigger staff, more restricted funding) and regulations (such as receiving bigger grant
awards with increased compliance demands).
i. Accounting Policy And Procedure Manual
One of the initial steps of a non-profit organization (NPOs) should be to establish an accounting policy and
procedure manual. An accounting policy and procedure manual documents the policies and procedures an
organization should use to record and monitor financial transactions. Documentation of accounting policies
and procedures is important because it provides clarity regarding internal processes. In addition, it can be
helpful to newcomers of a NPO while improving their financial management skills. Its purpose is to help
NPOs:
● Record all financial transactions
● Monitor and control expenditures
● Satisfy statutory reporting requirements
● Ensure timely and accurate financial and management reporting to donors and grant-makers
15
In general, this manual should outline the areas covered in the section below. An effort has been made to
simplify these procedures to make it easier for you to develop your own accounting policies and procedures
manual. As your organization grows in terms of level of activity and number of donors, it will be necessary to
update your procedure manual accordingly.
ii. Ngo Financial Management Manual
Sample Table of Contents
• Financial accounting routines

• The Chart of Accounts and cost center codes
• Delegated authority rules (that is, who can do what)
• The budget planning and management process
• Ordering and purchasing procedures
• Bank and cash handling procedures
• Management accounting routines and deadlines
• Management and control of fixed assets
• Staff benefits and allowances

• Annual audit arrangements
• How to deal with fraud and other irregularities
• Code of Conduct for staff and Board members
The manual may also include reference materials such as:
• organization chart,
• job descriptions,
• standard forms, and
• Glossary and/or list of acronyms and abbreviations.
1.4 KEY RESPONSIBILITIES FOR FINANCIAL MANAGEMENT?
Staff members at every level have a role to play in helping manage risks, answer to donors and beneficiaries
and deliver results for the organization. The Board is responsible for the financial oversight of your
organization and is ultimately accountable by law. However, the Board typically delegates the day-to-day
responsibilities to the executive director or top management who delegate some functions to senior
managers. The senior managers, in turn, delegate some functions downward, and so on, as illustrated in the
table below.
Players in Financial Sample Responsibilities

Management
• Oversee financial controls and ensure accountability
Board of Directors • Review and approve annual budget
(Trustees) • Approve financial policies, including delegating authority
• Review and approve financial reports and audited financial
statements
• Monitor and support resource mobilization
• Assess financial risks facing the NGO
16
• Report to the Board and manage budgeting process

Chief Executive Officer • Appoint/hire financial staff and delegate tasks
CEO • Review donor and other agreements/contracts
(Executive • Ensure financial records are accurate and up to date
Director) • Ensure correct, timely preparation and submission of
financial reports
• Ensure that program activities are in line with budget and
deliverables
• Monitor resource use and manage income generation
• Monitor financial needs of the organization and business planning
• Manage and monitor the budgets for their departments or projects
Senior • Review organization financial reports and give input to CEO
Managers • Further delegate some financial responsibilities to their team
• Project future financial needs
• Set project budgets to ensure that all costs are included (such
Program as deliverables, M&E implementation)
Staff • Control budgets to ensure money is spent as agreed and work
with finance staff to ensure policies and procedures are followed,
expenditures are coded and reported accurately
• Work with appropriate staff to ensure that procurements are

best value for money
• Handle the NGO’s cash, including banking and issuing receipts
Finance Staff • Administer the payment process to ensure bills are paid on time
• Complete the books of accounts and reconcile them every month
• Prepare internal and external financial report.
1.5 IMPORTANCE OF FINANCIAL MANAGEMENT:
USAID recognizes that the financial management of program assumes critical importance.
The financial management of the program deals with the following:
 Practices and arrangements for review and approval of annual work plans (AWPs) and
budgets; based on costing guidelines and approved activities
 Funds flow mechanisms;
 Financial powers and delegation;
 Financial accounting system;
 Internal controls to ensure funds are effectively used for program objectives,
 Financial reporting which includes management reporting and external reporting; and
 Audit and accountability at Centre and State.
During the implementation of USAID Program, implementing agencies do experience a number of financial
management system delays and some constraints. These include
 Procedural delays in releasing of funds,

 Lack of uniformity in reporting the utilization of funds,
17
 Inadequacy of reporting of performance based on resource concept in the absence of pooling of

resources,
 Issues related to financial delegation and powers,
 And management of funds at NGO level, lack of personnel with adequate skill sets to manage the
financial systems.
It is important that the program focuses on further strengthening/improving the existing financial management
arrangements and practices. As discussed above, the financial management aspects such as funds flow are
critical. Timely availability of funds is important and critical from program implementation point of view. It is
important that the process of preparing budget and developing annual plans must get completed on time.
Financial reporting system should facilitate the monitoring of programs effectively.
1.6 CORNERSTONES OF GOOD FINANCIAL MANAGEMENT
Discipline and Consistency lay the foundation for a good financial management structure to be built upon.
There are six cornerstones that shape the financial management structure:
Purchasing When you make a purchase you make-a commitment to spend the donor's money on
goods or services. Get this right by asking yourself these questions and only proceeding
when the answers to all of them are YES:
 Is the thing I want to spend money on included in the budget?
 Is the cost the same or less than in the budget?
 Is there enough unspent money in the budget line?
 Do I have all the competitive quotes needed?
 Is the supplier the best in terms of price and quality?
 Do I have a written explanation for why I did not choose any lower bids?
 Am I sure that the supplier is not in any way related to me or any of my
colleagues?
 Does the purchase comply with any award specific restrictions on procurement
"processes?' or
 Do I have a waiver for this specific transaction if needed?
 Do I have a complete document trail for each stage in the purchase to date?
Payments Payment is the latter stage of the purchasing process carried out by finance staff;
however, the agreement about when and how to pay is often part of the negotiations
for the purchase which is often carried out by non-finance staff, Suppliers and
consultants typically want payment as quickly as possible(often in advance)and, in many
countries, in, cash. It can be very tempting for the person negotiating the purchase (e.g.
the price of a workshop with a local hotel or a consultancy contract) to use advance
payments and payments in cash as bargaining tools. However most suppliers work with
a range of clients and are used to dealing with different payment regimes (The UN for
example never pays in cash). Cash payments are a particular problem as they involve
extra work and do not leave ah external trail of evidence(unlike payments by checks or
bank transfer).For cash flow reasons, it’s usually better to pay after purchase delivery or
at least to limit any advance payment to a percentage of the total cost. The
organizational finance manual should stipulate the percentage that may be paid in
advance and the procedure for doing so.
18
Cost Allocation Each cost must be allocated to a particular cost center code (see glossary for
description). A
Cost center can be allocation, project, or a budget line within a project. The cost
center or cost centers that the purchase is allocated to should be agreed on as soon as
possible. It will often be obvious but sometimes a particular purchase may have to be
split across different centers and this may involve some negotiation with other
colleagues who may have to give their approval.
These codes enable finance staff to record essential details of the transaction. Changing
cost allocations at a later stage means increasing the chance of an error and almost
assuring that the supporting documentation does not agree with the final recorded
detail in the accounting system. This will present problems during the audit stage. The
transaction may simply be disallowed or the auditor may take it as evidence that
procedures are lax.
Internal Internal controls are organizational processes and measures such as the procedure
Controls manual, internal audit, cash management, authority levels,-division of duties and
compliance with relevant laws. These are fundamental to good financial management
and all donors insist that a range of internal controls are in place before signing awards.
They are designed to ensure that assets are well looked after, fraud and mistakes are
difficult, accounts are accurate, laws and regulations are not broken, and staff are
protected. Internal controls are critical to ensuring projects are compliantly
implemented:
 They exist to protect you from making a mistake, and
 The donor relies on their existence and your ability to follow them
Reporting Funders rely on reports to know and understand what you have been doing with the
funds they have awarded. Reports are usually written weeks or even months after the
events occurred and it can be difficult to convey the full picture of an event or the
circumstances surrounding a particular decision in the formats provided.
On the other hand narrative and financial reports are the main means that your
organization has to explain how brilliant you are and how, despite the inevitable
obstacles and difficulties, you have managed to achieve the successes you have. It can be
tempting to focus only on the successes, ignoring the things that didn't go well or things
that did not happen at all. The problem with that approach is that nothing can be truly
hidden. The finance report shows clearly what has been attempted, completed and not
done at all. Both reports must tell the same story.
 Narrative Report "A narrative representation of the income and expenditures

compared to budgets and plans for a defined period."
 A financial report is "A financial representation of activities, deeds and inactions
compared to plans and expectations for a defined period.
Documentation Trust is a wonderful thing. It works best when there are two people who know each
other quite well and the issue at stake is personal to one or both of them.
With donor funds, there are always more than two people involved and only two of
them have a personal stake in either the investment or the outcome. You are neither of
those people.
Both the parties to an award contract are acting as agents for others. The donor is
19
acting on behalf of all the people who paid money through taxation or donations and
the implementer is acting on behalf of the beneficiaries who will benefit from the work
you are doing.
Neither the beneficiaries nor the individual donors can be present during the
implementation to see things for themselves. However, both want to know that the
funds have been used responsibly. Therefore, we have to keep documentary evidence
of every financial transaction as proof that the purchases actually happened and the
goods or services paid for were actually received.
1.7ATTRIBUTES OF GOOD FINANCIAL MANAGEMENT
Good Financial Management is the responsibility of all staff. There are clearly areas that are more relevant to
finance staff, and other areas that are under the control of non-finance staff like you. This course will uncover
and explore financial management principles and tools you can use to optimize compliance with USAID
financial rules and regulations – as you implement projects.
In its widest sense, financial management is about making sure that funds are used properly. Funds are used
properly when the right amount is spent on the right product at the right time with the right evidence to
prove it. Financial Management is not only about accounting -it also includes budgeting, controlling, reporting
– and a critical element is how you- as program and operational staff- oversee and manage the process by
which the funds are allocated, used ,and reported to the financial staff.
This is not an accounting course. You are not here to learn about accounting aspects of project management.
Your organization has a number of well-qualified and skilled accounting staff to deal with all of that for you.
During this course technical accounting terms will be used minimally- but it is inevitable that with so many
important documents to consider accounting related words or phrases will be used that have a specific and
not always obvious meaning. The glossary in this manual is a good place to check your understanding of
terms as well as your accounting colleagues.
The foundations of good financial management- Discipline and Consistency- are an important place to begin
building a solid appreciation of the attributes that form good financial management. In fact, the foundations
described on the following pages are necessary for good management, whether it be financial, human
resource or program.
Discipline Consistency
Always do the right thing Coding
It is usually one of the least convenient options to This is how your finance colleagues make sense of
take, it will usually take time, and it will usually everything that goes on. The person making the
make you appear to have less authority than you spending commitment (not the payment) is
might want others to believe you have. Doing the responsible for assigning the correct budget and
right thing is the mark of the true professional analysis codes to the transaction. If this is done
inconsistently, reports become meaningless and
financial management is impossible.
Never guess, always check Review
20
Rules, regulations and procedures have been All transactions should be reviewed. This provides an
carefully written to meet compliance requirements opportunity to correct errors and to amend coding
of the donor. Because each donor is different and decisions. This should be done early to ensure
individual awards from the same donor can have financial reports are accurate.
project specific rules, guessing is dangerous.
No short-cuts Decision making
Cutting corners with procedures might seem like Decision-making should be based on the budget
a good idea at the time, and of course, the agreed in the award and your organization's analysis
paperwork can always be put in order later on. In coding requirements.
almost every case however, the paperwork is not
put in place and the transaction or decision is
selected for closer review by the auditor. The few
minutes, hours, or days saved at the time is never
worth the worry of having your decision-making
questioned by the donor.
Follow procedure Authority
Always have a procedure manual handy. If none Authority levels should be clearly defined and
exists, lobby your colleagues to have one prepared maintained over different periods and different
that covers all aspects of financial decision making. projects.
Ask if unsure Reporting
You often only get one chance to make a Without a consistent approach to financial
commitment decision and you often cannot take it management decisions, reports become almost
back later if you have made a mistake without meaningless and will almost certainly lead to
incurring a financial or other cost. Unbudgeted incorrect and potentially disallowable expenditure
expenditure such as cancellation fee for a hotel
workshop booking is usually disallowable.
Peer review Project by project
It is good practice to ask a colleague to review All projects should follow the same procedures. To
financial decisions either at the time or soon after put it another way, ensure that your organization's
make sure proper procedure has been followed internal procedures meet the requirements of all of
and correct documentation received. your donors. Mistakes happen too easily when
officers have to use different procedures for different
projects.
Do not make promises you cannot keep Period by period
When talking to partners, suppliers and Procedures and rules need to be applied consistently
consultants is very careful not to commit your across time periods. If last year's evaluation
project or organization financially or otherwise workshop was charged out equally to all projects, do
until you are absolutely certain that a) You have not charge this year's to central overheads.
the authority, b) The necessary resources are
available, and c) The proper procedure has been
followed.
21
Respect authority levels Partner by partner
Remember, any agreements you make that exceed Treat each partner in exactly the same way. The rules
your formal authority level are not legally must be applied impartially.
enforceable and you may be asked to personally
fund any losses suffered because of it. Accepting a
particular level of authority means that you are
personally responsible for decisions made, if you
chose to delegate that authority either officially or
unofficially to another person, you are still
responsible for the actions and decisions made by
that person.
Read the contract Officer by officer
The particular contract and other identified Ensure that all officers with budgetary responsibility
documents contain all you need to know. Know are fully aware of their responsibilities and have been
where to find a copy of any document you might trained in all relevant procedures.
need and refer to them before making
commitments or spending decisions if you are at
all unsure.
22
OFT MANUAL: FM Cost Principles SECTION – 2
Cost Principles for Non-Profit Organizations

1. Purpose. This Circular establishes principles for determining costs of grants, contracts and other
agreements with non-profit organizations. It does not apply to colleges and universities which are
covered by Office of Management and Budget (OMB) Circular A-21, "Cost Principles for Educational
Institutions"; State, local, and federally recognized Indian tribal governments which are covered by
OMB Circular A-87, "Cost Principles for State, Local, and Indian Tribal Governments"; or hospitals.
The principles are designed to provide that the Federal Government bear its fair share of costs
except where restricted or prohibited by law. The principles do not attempt to prescribe the extent
of cost sharing or matching on grants, contracts, or other agreements. However, such cost sharing or
matching shall not be accomplished through arbitrary limitations on individual cost elements by
Federal agencies. Provision for profit or other increment above cost is outside the scope of this
Circular.
2. Supersession. This Circular supersedes cost principles issued by individual agencies for non-profit
organizations.
3. Applicability.
 These principles shall be used by all Federal agencies in determining the costs of work performed by
non-profit organizations under grants, cooperative agreements, cost reimbursement contracts, and
other contracts in which costs are used in pricing, administration, or settlement. All of these
instruments are hereafter referred to as awards. The principles do not apply to awards under which
an organization is not required to account to the Federal Government for actual costs incurred.
 All cost reimbursement sub awards (sub grants, subcontracts, etc.) are subject to those Federal cost
principles applicable to the particular organization concerned. Thus, if a sub award is to a non-profit
organization, this Circular shall apply; if a sub award is to a commercial organization, the cost
principles applicable to commercial concerns shall apply; if a sub award is to a college or university,
Circular A-21 shall apply; if a sub award is to a State, local, or federally recognized Indian tribal
government, Circular A-87 shall apply.
4. Definitions.
a. Non-profit organization means any corporation, trust, association, cooperative, or other organization
which:
 is operated primarily for scientific, educational, service, charitable, or similar purposes in the
public interest;
 is not organized primarily for profit; and
 uses its net proceeds to maintain, improve, and/or expand its operations. For this purpose,
the term "non-profit organization" excludes (i) colleges and universities; (ii) hospitals; (iii)
State, local, and federally recognized Indian tribal governments; and (iv) those non-profit
organizations which are excluded from coverage of this Circular in accordance with
paragraph 5.
b. Prior approval means securing the awarding agency's permission in advance to incur cost for those
items that are designated as requiring prior approval by the Circular. Generally this permission will
be in writing. Where an item of cost requiring prior approval is specified in the budget of an award,
approval of the budget constitutes approval of that cost.
23
5. Exclusion of some non-profit organizations

Some non-profit organizations, because of their size and nature of operations, can be considered to be
similar to commercial concerns for purpose of applicability of cost principles. Such non-profit organizations
shall operate under Federal cost principles applicable to commercial concerns. A listing of these organizations
is contained in Attachment C. Other organizations may be added from time to time.
6. Responsibilities. Agencies responsible for administering programs that involve awards to non-profit
organizations shall implement the provisions of this Circular. Upon request, implementing instruction shall be
furnished to OMB. Agencies shall designate a liaison official to serve as the agency representative on matters
relating to the implementation of this Circular. The name and title of such representative shall be furnished
to OMB within 30 days of the date of this Circular.
7. Attachments. The principles and related policy guides are set forth in the following Attachments:
Attachment A - General Principles
Attachment B - Selected Items of Cost
Attachment C - Non-Profit Organizations Not Subject To This Circular
8. Requests for exceptions. OMB may grant exceptions to the requirements of this Circular when
permissible under existing law. However, in the interest of achieving maximum uniformity, exceptions will be
permitted only in highly unusual circumstances.
9. Effective Date. The provisions of this Circular are effective immediately. Implementation shall be phased
in by incorporating the provisions into new awards made after the start of the organization's next fiscal year.
For existing awards, the new principles may be applied if an organization and the cognizant Federal agency
agree. Earlier implementation, or a delay in implementation of individual provisions, is also permitted by
mutual agreement between an organization and the cognizant Federal agency.
10. Inquiries. Further information concerning this Circular may be obtained by contacting the Office of
Federal Financial Management, OMB, Washington, DC 20503, telephone (202) 395-3993 Attachments
24
Table of Contents for this course
A. Basic Considerations
1. Composition of total costs
2. Factors affecting allowability of costs
3. Reasonable costs
4. Allocable costs
5. Applicable credits
6. Advance understandings
7. Conditional exemptions
B. Direct Costs
C. Indirect Costs
D. Allocation of Indirect Costs and Determination of Indirect Cost Rates

1. General
2. Simplified allocation method
3. Multiple allocation base method
4. Direct allocation method
5. Special indirect cost rates
E. Negotiation and Approval of Indirect Cost Rates

1. Definitions
2. Negotiation and approval of rates
25
GENERAL PRINCIPLES
Basic Considerations
1. Composition of total costs. The total cost of an award is the sum of the allowable direct and allocable
indirect costs less any applicable credits.
2. Factors affecting allowability of costs. To be allowable under an award, costs must meet the following
general criteria:
a. Be reasonable for the performance of the award and be allocable thereto under these principles.
b. Conform to any limitations or exclusions set forth in these principles or in the award as to types or
amount of cost items.
c. Be consistent with policies and procedures that apply uniformly to both federally financed and other
activities of the organization.
d. Be accorded consistent treatment.
e. Be determined in accordance with generally accepted accounting principles (GAAP).
f. Not be included as a cost or used to meet cost sharing or matching requirements of any other federally
financed program in either the current or a prior period.
g. Be adequately documented.
3. Reasonable costs.
A cost is reasonable if, in its nature or amount, it does not exceed that which would be incurred by a
prudent person under the circumstances prevailing at the time the decision was made to incur the costs. The
question of the reasonableness of specific costs must be scrutinized with particular care in connection with
organizations or separate divisions thereof which receive the preponderance of their support from awards
made by Federal agencies. In determining the reasonableness of a given cost, consideration shall be given to:
a. Whether the cost is of a type generally recognized as ordinary and necessary for the operation of the
organization or the performance of the award.
b. The restraints or requirements imposed by such factors as generally accepted sound business practices,
arm’s length bargaining, Federal and State laws and regulations, and terms and conditions of the award.
c. Whether the individuals concerned acted with prudence in the circumstances, considering their
responsibilities to the organization, its members, employees, and clients, the public at large, and the
Federal Government.
d. Significant deviations from the established practices of the organization which may unjustifiably increase
the award costs.
4. Allocable costs.
a. A cost is allocable to a particular cost objective, such as a grant, contract, project, service, or other
activity, in accordance with the relative benefits received. A cost is allocable to a Federal award if it is
26
treated consistently with other costs incurred for the same purpose in like circumstances and if it:
(1) Is incurred specifically for the award.
(2) Benefits both the award and other work and can be distributed in reasonable proportion to the
benefits received, or
(3) Is necessary to the overall operation of the organization, although a direct relationship to any
particular cost objective cannot be shown.
b. Any cost allocable to a particular award or other cost objective under these principles may not be shifted
to other Federal awards to overcome funding deficiencies, or to avoid restrictions imposed by law or by
the terms of the award.
5. Applicable credits.
a. The term applicable credits refers to those receipts, or reduction of expenditures which operate to offset
or reduce expense items that are allocable to awards as direct or indirect costs. Typical examples of such
transactions are: purchase discounts, rebates or allowances, recoveries or indemnities on losses, insurance
refunds, and adjustments of overpayments or erroneous charges. To the extent that such credits accruing
or received by the organization relate to allowable cost, they shall be credited to the Federal Government
either as a cost reduction or cash refund, as appropriate.
b. In some instances, the amounts received from the Federal Government to finance organizational activities
or service operations should be treated as applicable credits. Specifically, the concept of netting such
credit items against related expenditures should be applied by the organization in determining the rates or
amounts to be charged to Federal awards for services rendered whenever the facilities or other resources
used in providing such services have been financed directly, in whole or in part, by Federal funds.
c. For rules covering program income (i.e., gross income earned from federally supported activities) see Sec.
__.24 of Office of Management and Budget (OMB) Circular A-110, "Uniform Administrative Requirements
for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit
Organizations."
6. Advance understandings. Under any given award, the reasonableness and allocability of certain items of
costs may be difficult to determine. This is particularly true in connection with organizations that receive a
preponderance of their support from Federal agencies. In order to avoid subsequent disallowance or dispute
based on unreasonableness or nonallocability, it is often desirable to seek a written agreement with the
cognizant or awarding agency in advance of the incurrence of special or unusual costs. The absence of an
advance agreement on any element of cost will not, in itself, affect the reasonableness or allocability of that
element.
6. Conditional exemptions.
a. OMB authorizes conditional exemption from OMB administrative requirements and cost principles
circulars for certain Federal programs with statutorily-authorized consolidated planning and consolidated
administrative funding that are identified by a Federal agency and approved by the head of the Executive
department or establishment. A Federal agency shall consult with OMB during its consideration of
whether to grant such an exemption.
27
b. To promote efficiency in State and local program administration, when Federal non-entitlement programs
with common purposes have specific statutorily-authorized consolidated planning and consolidated
administrative funding and where most of the State agency's resources come from non-Federal sources,
Federal agencies may exempt these covered State-administered, non-entitlement grant programs from
certain OMB grants management requirements. The exemptions would be from all but the allocability of
costs provisions of OMB Circulars A-87 (Attachment A, subsection C.3), "Cost Principles for State, Local,
and Indian Tribal Governments," A-21 (Section C, subpart 4), "Cost Principles for Educational
Institutions," and A-122 (Attachment A, subsection A.4), "Cost Principles for Non-Profit Organizations,"
and from all of the administrative requirements provisions of OMB Circular A-110, "Uniform
Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals,
and Other Non-Profit Organizations," and the agencies' grants management common rule.
c. When a Federal agency provides this flexibility, as a prerequisite to a State's exercising this option, a State
must adopt its own written fiscal and administrative requirements for expending and accounting for all
funds, which are consistent with the provisions of OMB Circular A-87, and extend such policies to all sub
recipients. These fiscal and administrative requirements must be sufficiently specific to ensure that: funds
are used in compliance with all applicable Federal statutory and regulatory provisions, costs are reasonable
and necessary for operating these programs, and funds are not be used for general expenses required to
carry out other responsibilities of a State or its sub recipients.
B. Direct Costs
1. Direct costs are those that can be identified specifically with a particular final cost objective, i.e., a
particular award, project, service, or other direct activity of an organization. However, a cost may not be
assigned to an award as a direct cost if any other cost incurred for the same purpose, in like circumstance,
has been allocated to an award as an indirect cost. Costs identified specifically with awards are direct costs of
the awards and are to be assigned directly thereto. Costs identified specifically with other final cost
objectives of the organization are direct costs of those cost objectives and are not to be assigned to other
awards directly or indirectly.
2. Any direct cost of a minor amount may be treated as an indirect cost for reasons of practicality where the
accounting treatment for such cost is consistently applied to all final cost objectives.
3. The cost of certain activities are not allowable as charges to Federal awards (see, for example, fundraising
costs in paragraph 17 of Attachment B). However, even though these costs are unallowable for purposes of
computing charges to Federal awards, they nonetheless must be treated as direct costs for purposes of
determining indirect cost rates and be allocated their share of the organization's indirect costs if they
represent activities which (1) include the salaries of personnel, (2) occupy space, and (3) benefit from the
organization's indirect costs.
4. The costs of activities performed primarily as a service to members, clients, or the general public when
significant and necessary to the organization's mission must be treated as direct costs whether or not
allowable and be allocated an equitable share of indirect costs. Some examples of these types of activities
include:
a. Maintenance of membership rolls, subscriptions, publications, and related functions.
b. Providing services and information to members, legislative or administrative bodies, or the public.
28
c. Promotion, lobbying, and other forms of public relations.
d. Meetings and conferences except those held to conduct the general administration of the organization.
e. Maintenance, protection, and investment of special funds not used in operation of the organization.
f. Administration of group benefits on behalf of members or clients, including life and hospital insurance,
annuity or retirement plans, financial aid, etc.
C. Indirect Costs
1. Indirect costs are those that have been incurred for common or joint objectives and cannot be readily
identified with a particular final cost objective. Direct cost of minor amounts may be treated as indirect costs
under the conditions described in subparagraph B.2. After direct costs have been determined and assigned
directly to awards or other work as appropriate, indirect costs are those remaining to be allocated to
benefiting cost objectives. A cost may not be allocated to an award as an indirect cost if any other cost
incurred for the same purpose, in like circumstances, has been assigned to an award as a direct cost.
2. Because of the diverse characteristics and accounting practices of non-profit organizations, it is not
possible to specify the types of cost which may be classified as indirect cost in all situations. However, typical
examples of indirect cost for many non-profit organizations may include depreciation or use allowances on
buildings and equipment, the costs of operating and maintaining facilities, and general administration and
general expenses, such as the salaries and expenses of executive officers, personnel administration, and
accounting.
3. Indirect costs shall be classified within two broad categories: "Facilities" and "Administration." "Facilities" is
defined as depreciation and use allowances on buildings, equipment and capital improvement, interest on debt
associated with certain buildings, equipment and capital improvements, and operations and maintenance
expenses. "Administration" is defined as general administration and general expenses such as the director's
office, accounting, personnel, library expenses and all other types of expenditures not listed specifically under
one of the subcategories of "Facilities" (including cross allocations from other pools, where applicable). See
indirect cost rate reporting requirements in subparagraphs D.2.e and D.3.g.
D. Allocation of Indirect Costs and Determination of Indirect Cost Rates
1. General
.
a. Where a non-profit organization has only one major function, or where all its major functions benefit
from its indirect costs to approximately the same degree, the allocation of indirect costs and the
computation of an indirect cost rate may be accomplished through simplified allocation procedures, as
described in subparagraph 2.
b. Where an organization has several major functions which benefit from its indirect costs in varying degrees,
allocation of indirect costs may require the accumulation of such costs into separate cost groupings which
then are allocated individually to benefiting functions by means of a base which best measures the relative
degree of benefit. The indirect costs allocated to each function are then distributed to individual awards
and other activities included in that function by means of an indirect cost rate(s).
c. The determination of what constitutes an organization's major functions will depend on its purpose in
being; the types of services it renders to the public, its clients, and its members; and the amount of effort
29
it devotes to such activities as fundraising, public information and membership activities.
d. Specific methods for allocating indirect costs and computing indirect cost rates along with the conditions
under which each method should be used are described in subparagraphs 2 through 5.
e. The base period for the allocation of indirect costs is the period in which such costs are incurred and
accumulated for allocation to work performed in that period. The base period normally should coincide
with the organization's fiscal year but, in any event, shall be so selected as to avoid inequities in the
allocation of the costs.
2. Simplified allocation method.
a. Where an organization's major functions benefit from its indirect costs to approximately the same degree,
the allocation of indirect costs may be accomplished by (i) separating the organization's total costs for the
base period as either direct or indirect, and (ii) dividing the total allowable indirect costs (net of applicable
credits) by an equitable distribution base. The result of this process is an indirect cost rate which is used
to distribute indirect costs to individual awards. The rate should be expressed as the percentage which
the total amount of allowable indirect costs bears to the base selected. This method should also be used
where an organization has only one major function encompassing a number of individual projects or
activities, and may be used where the level of Federal awards to an organization is relatively small.
b. Both the direct costs and the indirect costs shall exclude capital expenditures and unallowable costs.
However, unallowable costs which represent activities must be included in the direct costs under the
conditions described in subparagraph B.3.
c. The distribution base may be total direct costs (excluding capital expenditures and other distorting items,
such as major subcontracts or sub grants), direct salaries and wages, or other base which results in an
equitable distribution. The distribution base shall generally exclude participant support costs as defined in
paragraph 32 of Attachment B.
d. Except where a special rate(s) is required in accordance with subparagraph 5, the indirect cost rate
developed under the above principles is applicable to all awards at the organization. If a special rate(s) is
required, appropriate modifications shall be made in order to develop the special rate(s).
e. For an organization that receives more than $10 million in Federal funding of direct costs in a fiscal year, a
breakout of the indirect cost component into two broad categories, Facilities and Administration as
defined in subparagraph C.3, is required. The rate in each case shall be stated as the percentage which the
amount of the particular indirect cost category (i.e., Facilities or Administration) is of the distribution base
identified with that category.
3. Multiple allocation base method
a. General. Where an organization's indirect costs benefit its major functions in varying degrees, indirect
costs shall be accumulated into separate cost groupings, as described in subparagraph b. Each grouping
shall then be allocated individually to benefitting functions by means of a base which best measures the
relative benefits. The default allocation bases by cost pool are described in subparagraph c.
b. Identification of indirect costs. Cost groupings shall be established so as to permit the allocation of
each grouping on the basis of benefits provided to the major functions. Each grouping shall constitute a
pool of expenses that are of like character in terms of functions they benefit and in terms of the allocation
30
base which best measures the relative benefits provided to each function. The groupings are classified
within the two broad categories: "Facilities" and "Administration," as described in subparagraph C.3. The
indirect cost pools are defined as follows:
(1) Depreciation and use allowances. The expenses under this heading are the portion of the costs of
the organization's buildings, capital improvements to land and buildings, and equipment which are
computed in accordance with paragraph 11 of Attachment B ("Depreciation and use allowances").
(2) Interest. Interest on debt associated with certain buildings, equipment and capital improvements are
computed in accordance with paragraph 23 of Attachment B ("Interest").
(3) Operation and maintenance expenses. The expenses under this heading are those that have been
incurred for the administration, operation, maintenance, preservation, and protection of the organization's
physical plant. They include expenses normally incurred for such items as: janitorial and utility services;
repairs and ordinary or normal alterations of buildings, furniture and equipment; care of grounds;
maintenance and operation of buildings and other plant facilities; security; earthquake and disaster
preparedness; environmental safety; hazardous waste disposal; property, liability and other insurance
relating to property; space and capital leasing; facility planning and management; and, central receiving. The
operation and maintenance expenses category shall also include its allocable share of fringe benefit costs,
depreciation and use allowances, and interest costs.
(4) General administration and general expenses. The expenses under this heading are those that
have been incurred for the overall general executive and administrative offices of the organization and
other expenses of a general nature which do not relate solely to any major function of the organization.
This category shall also include its allocable share of fringe benefit costs, operation and maintenance
expense, depreciation and use allowances, and interest costs. Examples of this category include central
offices, such as the director's office, the office of finance, business services, budget and planning, personnel,
safety and risk management, general counsel, management information systems, and library costs.
In developing this cost pool, special care should be exercised to ensure that costs incurred for the same
purpose in like circumstances are treated consistently as either direct or indirect costs. For example,
salaries of technical staff, project supplies, project publication, telephone toll charges, computer costs,
travel costs, and specialized services costs shall be treated as direct costs wherever identifiable to a
particular program. The salaries and wages of administrative and pooled clerical staff should normally be
treated as indirect costs. Direct charging of these costs may be appropriate where a major project or
activity explicitly requires and budgets for administrative or clerical services and other individuals involved
can be identified with the program or activity. Items such as office supplies, postage, local telephone costs,
periodicals and memberships should normally be treated as indirect costs.
c. Allocation bases. Actual conditions shall be taken into account in selecting the base to be used in
allocating the expenses in each grouping to benefitting functions. The essential consideration in selecting a
method or a base is that it is the one best suited for assigning the pool of costs to cost objectives in
accordance with benefits derived; a traceable cause and effect relationship; or logic and reason, where
neither the cause nor the effect of the relationship is determinable. When an allocation can be made by
assignment of a cost grouping directly to the function benefited, the allocation shall be made in that
manner. When the expenses in a cost grouping are more general in nature, the allocation shall be made
through the use of a selected base which produces results that are equitable to both the Federal
Government and the organization. The distribution shall be made in accordance with the bases described
herein unless it can be demonstrated that the use of a different base would result in a more equitable
allocation of the costs, or that a more readily available base would not increase the costs charged to
sponsored awards. The results of special cost studies (such as an engineering utility study) shall not be
31
used to determine and allocate the indirect costs to sponsored awards.
(1) Depreciation and use allowances. Depreciation and use allowances expenses shall be allocated in
the following manner:
(a) Depreciation or use allowances on buildings used exclusively in the conduct of a single
function, and on capital improvements and equipment used in such buildings, shall be assigned to
that function.
(b) Depreciation or use allowances on buildings used for more than one function, and on capital
improvements and equipment used in such buildings, shall be allocated to the individual functions
performed in each building on the basis of usable square feet of space, excluding common areas,
such as hallways, stairwells, and restrooms.
(c) Depreciation or use allowances on buildings, capital improvements and equipment related
space (e.g., individual rooms, and laboratories) used jointly by more than one function (as
determined by the users of the space) shall be treated as follows. The cost of each jointly used
unit of space shall be allocated to the benefitting functions on the basis of:
(i) the employees and other users on a full-time equivalent (FTE) basis or salaries and wages of
those individual functions benefitting from the use of that space; or
(ii) organization-wide employee FTEs or salaries and wages applicable to the benefitting functions
of the organization.
(d) Depreciation or use allowances on certain capital improvements to land, such as paved parking areas,
fences, sidewalks, and the like, not included in the cost of buildings, shall be allocated to user categories on
a FTE basis and distributed to major functions in proportion to the salaries and wages of all employees
applicable to the functions.
(2) Interest. Interest costs shall be allocated in the same manner as the depreciation or use allowances
on the buildings, equipment and capital equipments to which the interest relates.
(3) Operation and maintenance expenses. Operation and maintenance expenses shall be allocated in
the same manner as the depreciation and use allowances.
(4) General administration and general expenses. General administration and general expenses shall
be allocated to benefitting functions based on modified total direct costs (MTDC), as described in
subparagraph D.3.f. The expenses included in this category could be grouped first according to major
functions of the organization to which they render services or provide benefits. The aggregate expenses of
each group shall then be allocated to benefitting functions based on MTDC.
d. Order of distribution.
(1) Indirect cost categories consisting of depreciation and use allowances, interest, operation and
maintenance, and general administration and general expenses shall be allocated in that order to the
remaining indirect cost categories as well as to the major functions of the organization. Other cost
categories could be allocated in the order determined to be most appropriate by the organization. When
cross allocation of costs is made as provided in subparagraph (2), this order of allocation does not apply.
(2) Normally, an indirect cost category will be considered closed once it has been allocated to other cost
32
objectives, and costs shall not be subsequently allocated to it. However, a cross allocation of costs
between two or more indirect costs categories could be used if such allocation will result in a more
equitable allocation of costs. If a cross allocation is used, an appropriate modification to the composition
of the indirect cost categories is required.
e. Application of indirect cost rate or rates. Except where a special indirect cost rate(s) is required in
accordance with subparagraph D.5, the separate groupings of indirect costs allocated to each major
function shall be aggregated and treated as a common pool for that function. The costs in the common
pool shall then be distributed to individual awards included in that function by use of a single indirect cost
rate.
f. Distribution basis. Indirect costs shall be distributed to applicable sponsored awards and other
benefitting activities within each major function on the basis of MTDC. MTDC consists of all salaries and
wages, fringe benefits, materials and supplies, services, travel, and sub grants and subcontracts up to the
first $25,000 of each sub grant or subcontract (regardless of the period covered by the sub grant or
subcontract). Equipment, capital expenditures, charges for patient care, rental costs and the portion in
excess of $25,000 shall be excluded from MTDC. Participant support costs shall generally be excluded
from MTDC. Other items may only be excluded when the Federal cost cognizant agency determines that
exclusion is necessary to avoid a serious inequity in the distribution of indirect costs.
g. Individual Rate Components. An indirect cost rate shall be determined for each separate indirect cost
pool developed. The rate in each case shall be stated as the percentage which the amount of the particular
indirect cost pool is of the distribution base identified with that pool. Each indirect cost rate negotiation
or determination agreement shall include development of the rate for each indirect cost pool as well as
the overall indirect cost rate. The indirect cost pools shall be classified within two broad categories:
"Facilities" and "Administration," as described in subparagraph C.3.
4. Direct allocation method.

a. Some non-profit organizations treat all costs as direct costs except general administration and general
expenses. These organizations generally separate their costs into three basic categories: (i) General
administration and general expenses, (ii) fundraising, and (iii) other direct functions (including projects
performed under Federal awards). Joint costs, such as depreciation, rental costs, operation and
maintenance of facilities, telephone expenses, and the like are prorated individually as direct costs to each
category and to each award or other activity using a base most appropriate to the particular cost being
prorated.
b. This method is acceptable, provided each joint cost is prorated using a base which accurately measures
the benefits provided to each award or other activity. The bases must be established in accordance with
reasonable criteria, and be supported by current data. This method is compatible with the Standards of
Accounting and Financial Reporting for Voluntary Health and Welfare Organizations issued jointly by the
National Health Council, Inc., the National Assembly of Voluntary Health and Social Welfare
Organizations, and the United Way of America.
c. Under this method, indirect costs consist exclusively of general administration and general expenses. In all
other respects, the organization's indirect cost rates shall be computed in the same manner as that
described in subparagraph 2.
5. Special indirect cost rates. In some instances, a single indirect cost rate for all activities of an
organization or for each major function of the organization may not be appropriate, since it would not take
into account those different factors which may substantially affect the indirect costs applicable to a particular
segment of work. For this purpose, a particular segment of work may be that performed under a single
33
award or it may consist of work under a group of awards performed in a common environment. These
factors may include the physical location of the work, the level of administrative support required, the nature
of the facilities or other resources employed, the scientific disciplines or technical skills involved, the
organizational arrangements used, or any combination thereof. When a particular segment of work is
performed in an environment which appears to generate a significantly different level of indirect costs,
provisions should be made for a separate indirect cost pool applicable to such work. The separate indirect
cost pool should be developed during the course of the regular allocation process, and the separate indirect
cost rate resulting therefrom should be used, provided it is determined that (i) the rate differs significantly
from that which would have been obtained under subparagraphs 2, 3, and 4, and (ii) the volume of work to
which the rate would apply is material.
E. Negotiation and Approval of Indirect Cost Rates

1. Definitions. As used in this section, the following terms have the meanings set forth below:
a. Cognizant agency means the Federal agency responsible for negotiating and approving indirect cost rates
for a non-profit organization on behalf of all Federal agencies.
b. Predetermined rate means an indirect cost rate, applicable to a specified current or future period, usually
the organization's fiscal year. The rate is based on an estimate of the costs to be incurred during the
period. A predetermined rate is not subject to adjustment.
c. Fixed rate means an indirect cost rate which has the same characteristics as a predetermined rate, except
that the difference between the estimated costs and the actual costs of the period covered by the rate is
carried forward as an adjustment to the rate computation of a subsequent period.
d. Final rate means an indirect cost rate applicable to a specified past period which is based on the actual
costs of the period. A final rate is not subject to adjustment.
e. Provisional rate or billing rate means a temporary indirect cost rate applicable to a specified period which
is used for funding, interim reimbursement, and reporting indirect costs on awards pending the
establishment of a final rate for the period.
f. Indirect cost proposal means the documentation prepared by an organization to substantiate its claim for
the reimbursement of indirect costs. This proposal provides the basis for the review and negotiation
leading to the establishment of an organization's indirect cost rate.
g. Cost objective means a function, organizational subdivision, contract, grant, or other work unit for which
cost data are desired and for which provision is made to accumulate and measure the cost of processes,
projects, jobs and capitalized projects.
2. Negotiation and approval of rates.
a. Unless different arrangements are agreed to by the agencies concerned, the Federal agency with the
largest dollar value of awards with an organization will be designated as the cognizant agency for the
negotiation and approval of the indirect cost rates and, where necessary, other rates such as fringe benefit
and computer charge-out rates. Once an agency is assigned cognizance for a particular non-profit
organization, the assignment will not be changed unless there is a major long-term shift in the dollar
volume of the Federal awards to the organization. All concerned Federal agencies shall be given the
opportunity to participate in the negotiation process but, after a rate has been agreed upon, it will be
accepted by all Federal agencies. When a Federal agency has reason to believe that special operating
34
factors affecting its awards necessitate special indirect cost rates in accordance with subparagraph D.5, it
will, prior to the time the rates are negotiated, notify the cognizant agency.
b. A non-profit organization which has not previously established an indirect cost rate with a Federal agency
shall submit its initial indirect cost proposal immediately after the organization is advised that an award will
be made and, in no event, later than three months after the effective date of the award.
c. Organizations that have previously established indirect cost rates must submit a new indirect cost
proposal to the cognizant agency within six months after the close of each fiscal year.
d. A predetermined rate may be negotiated for use on awards where there is reasonable assurance, based
on past experience and reliable projection of the organization's costs, that the rate is not likely to exceed
a rate based on the organization's actual costs.
e. Fixed rates may be negotiated where predetermined rates are not considered appropriate. A fixed rate,
however, shall not be negotiated if (i) all or a substantial portion of the organization's awards are expected
to expire before the carry-forward adjustment can be made; (ii) the mix of Federal and non-Federal work
at the organization is too erratic to permit an equitable carry-forward adjustment; or (iii) the
organization's operations fluctuate significantly from year to year.
f. Provisional and final rates shall be negotiated where neither predetermined nor fixed rates are
appropriate.
g. The results of each negotiation shall be formalized in a written agreement between the cognizant agency
and the non-profit organization. The cognizant agency shall distribute copies of the agreement to all
concerned Federal agencies.
h. If a dispute arises in a negotiation of an indirect cost rate between the cognizant agency and the non-profit
organization, the dispute shall be resolved in accordance with the appeals procedures of the cognizant
agency.
i. To the extent that problems are encountered among the Federal agencies in connection with the
negotiation and approval process, OMB will lend assistance as required to resolve such problems in a
timely manner.
35
SELECTED ITEMS OF COST
Table of Contents
1. Advertising and public relations costs

2. Advisory councils
3. Alcoholic beverages
4. Audit costs and related services
5. Bad debts
6. Bonding costs
7. Communication costs
8. Compensation for personal services
9. Contingency provisions
10. Defense and prosecution of criminal and civil proceedings, claims, appeals and patent
infringement
11. Depreciation and use allowances
12. Donations and contributions
13. Employee morale, health, and welfare costs
14. Entertainment costs
15. Equipment and other capital expenditures
16. Fines and penalties
17. Fund raising and investment management costs
18. Gains and losses on depreciable assets
19. Goods or services for personal use
20. Housing and personal living expenses
21. Idle facilities and idle capacity
22. Insurance and indemnification
23. Interest
24. Labor relations costs
25. Lobbying
26. Losses on other sponsored agreements or contracts
27. Maintenance and repair costs
28. Materials and supplies costs
29. Meetings and conferences
30. Memberships, subscriptions, and professional activity costs
31. Organization costs
32. Page charges in professional journals
33. Participant support costs
34. Patent costs
35. Plant and homeland security costs
36. Pre-agreement costs
37. Professional services costs
38. Publication and printing costs
39. Rearrangement and alteration costs
40. Reconversion costs
41. Recruiting costs
42. Relocation costs
43. Rental costs of buildings and equipment
44. Royalties and other costs for use of patents and copyrights
45. Selling and marketing
46. Specialized service facilities
36
47. Taxes
48. Termination costs applicable to sponsored agreements
49. Training costs
50. Transportation costs
51. Travel costs
52. Trustees
37
Paragraphs 1 through 53 provide principles to be applied in establishing the allowability of certain items of
cost. These principles apply whether a cost is treated as direct or indirect. Failure to mention a particular
item of cost is not intended to imply that it is unallowable; rather, determination as to allowability in each
case should be based on the treatment or principles provided for similar or related items of cost.
1. Advertising and public relations costs.

a. The term advertising costs means the costs of advertising media and corollary administrative costs.
Advertising media include magazines, newspapers, radio and television, direct mail, exhibits,
electronic or computer transmittals, and the like.
b. The term public relations includes community relations and means those activities dedicated to
maintaining the image of the non-profit organization or maintaining or promoting understanding and
favorable relations with the community or public at large or any segment of the public.
c. The only allowable advertising costs are those which are solely for:
(1) The recruitment of personnel required for the performance by the non-profit organization of
obligations arising under a Federal award (See also Attachment B, paragraph 41, Recruiting costs,
and paragraph 42, Relocation costs);
(2) The procurement of goods and services for the performance of a Federal award;
(3) The disposal of scrap or surplus materials acquired in the performance of a Federal award
except when non-profit organizations are reimbursed for disposal costs at a predetermined amount;
or
(4) Other specific purposes necessary to meet the requirements of the Federal award.
d. The only allowable public relations costs are:
(1) Costs specifically required by the Federal award;
(2) Costs of communicating with the public and press pertaining to specific activities or
accomplishments which result from performance of Federal awards (these costs are considered
necessary as part of the outreach effort for the Federal award); or
(3) Costs of conducting general liaison with news media and government public relations officers, to
the extent that such activities are limited to communication and liaison necessary keep the public
informed on matters of public concern, such as notices of Federal contract/grant awards, financial
matters, etc.
e. Costs identified in subparagraphs c and d if incurred for more than one Federal award or for both
sponsored work and other work of the non-profit organization, are allowable to the extent that the
principles in Attachment A, paragraphs B. ("Direct Costs") and C. ("Indirect Costs") are observed.
f. Unallowable advertising and public relations costs include the following:
(1) All advertising and public relations costs other than as specified in subparagraphs c, d, and e;
38
(2) Costs of meetings, conventions, convocations, or other events related to other activities of the
non-profit organization, including:
(a) Costs of displays, demonstrations, and exhibits;
(b) Costs of meeting rooms, hospitality suites, and other special facilities used in conjunction with
shows and other special events; and
(c) Salaries and wages of employees engaged in setting up and displaying exhibits, making
demonstrations, and providing briefings;
(3) Costs of promotional items and memorabilia, including models, gifts, and souvenirs;
(4) Costs of advertising and public relations designed solely to promote the non-profit organization.
2. Advisory Councils
Costs incurred by advisory councils or committees are allowable as a direct cost where authorized by the
Federal awarding agency or as an indirect cost where allocable to Federal awards.
3. Alcoholic beverages. Costs of alcoholic beverages are unallowable.
4. Audit costs and related services
a. The costs of audits required by, and performed in accordance with, the Single Audit Act, as
implemented by Circular A-133, "Audits of States, Local Governments, and Non-Profit Organizations"
are allowable. Also see 31 USC 7505(b) and section 230 ("Audit Costs") of Circular A-133.
b. Other audit costs are allowable if included in an indirect cost rate proposal, or if specifically approved
by the awarding agency as a direct cost to an award.
c. The cost of agreed-upon procedures engagements to monitor sub recipients who are exempted from
A-133 under section 200(d) are allowable, subject to the conditions listed in A-133, section 230 (b)(2).
5. Bad debts. Bad debts, including losses (whether actual or estimated) arising from uncollectable accounts
and other claims, related collection costs, and related legal costs, are unallowable.
6. Bonding costs.
a. Bonding costs arise when the Federal Government requires assurance against financial loss to itself or
others by reason of the act or default of the non-profit organization. They arise also in instances
where the non-profit organization requires similar assurance. Included are such bonds as bid,
performance, payment, advance payment, infringement, and fidelity bonds.
b. Costs of bonding required pursuant to the terms of the award are allowable.
c. Costs of bonding required by the non-profit organization in the general conduct of its operations are
allowable to the extent that such bonding is in accordance with sound business practice and the rates
and premiums are reasonable under the circumstances.
7. Communication costs. Costs incurred for telephone services, local and long distance telephone calls,
telegrams, postage, messenger, electronic or computer transmittal services and the like are allowable.
39
8. Compensation for personal services.
a. Definition. Compensation for personal services includes all compensation paid currently or accrued
by the organization for services of employees rendered during the period of the award (except as
otherwise provided in subparagraph h). It includes, but is not limited to, salaries, wages, director's and
executive committee member's fees, incentive awards, fringe benefits, pension plan costs, and
allowances for off-site pay, incentive pay, location allowances, hardship pay, and cost of living
differentials.
b. Allowability. Except as otherwise specifically provided in this paragraph, the costs of such
compensation are allowable to the extent that:
(1) Total compensation to individual employees is reasonable for the services rendered and conforms
to the established policy of the organization consistently applied to both Federal and non-Federal
activities; and
(2) Charges to awards whether treated as direct or indirect costs are determined and supported as
required in this paragraph.
c. Reasonableness.
(1) When the organization is predominantly engaged in activities other than those sponsored by the
Federal Government, compensation for employees on federally sponsored work will be considered
reasonable to the extent that it is consistent with that paid for similar work in the organization's other
activities.
(2) When the organization is predominantly engaged in federally sponsored activities and in cases
where the kind of employees required for the Federal activities are not found in the organization's
other activities, compensation for employees on federally sponsored work will be considered
reasonable to the extent that it is comparable to that paid for similar work in the labor markets in
which the organization competes for the kind of employees involved.
d. Special considerations in determining allowability.

Certain conditions require special consideration and possible limitations in determining costs under
Federal awards where amounts or types of compensation appear unreasonable. Among such conditions
are the following:
(1) Compensation to members of non-profit organizations, trustees, directors, associates, officers, or

the immediate families thereof. Determination should be made that such compensation is reasonable
for the actual personal services rendered rather than a distribution of earnings in excess of costs.
(2) Any change in an organization's compensation policy resulting in a substantial increase in the
organization's level of compensation, particularly when it was concurrent with an increase in the ratio
of Federal awards to other activities of the organization or any change in the treatment of allowability
of specific types of compensation due to changes in Federal policy.
e. Unallowable costs. Costs which are unallowable under other paragraphs of this Attachment shall not
be allowable under this paragraph solely on the basis that they constitute personal compensation.
40
f. Overtime, extra-pay shift, and multi-shift premiums. Premiums for overtime, extra-pay shifts,
and multi-shift work are allowable only with the prior approval of the awarding agency except:
(1) When necessary to cope with emergencies, such as those resulting from accidents, natural
disasters, breakdowns of equipment, or occasional operational bottlenecks of a sporadic nature.
(2) When employees are performing indirect functions, such as administration, maintenance, or
accounting.
(3) In the performance of tests, laboratory procedures, or other similar operations which are
continuous in nature and cannot reasonably be interrupted or otherwise completed.
(4) When lower overall cost to the Federal Government will result.
g. Fringe benefits.
(1) Fringe benefits in the form of regular compensation paid to employees during periods of authorized
absences from the job, such as vacation leave, sick leave, military leave, and the like, are allowable,
provided such costs are absorbed by all organization activities in proportion to the relative amount of
time or effort actually devoted to each.
(2) Fringe benefits in the form of employer contributions or expenses for social security, employee
insurance, workmen's compensation insurance, pension plan costs (see subparagraph h), and the like,
are allowable, provided such benefits are granted in accordance with established written organization
policies. Such benefits whether treated as indirect costs or as direct costs, shall be distributed to
particular awards and other activities in a manner consistent with the pattern of benefits accruing to
the individuals or group of employees whose salaries and wages are chargeable to such awards and
other activities.
(3) (a) Provisions for a reserve under a self-insurance program for unemployment compensation or
workers' compensation are allowable to the extent that the provisions represent reasonable estimates
of the liabilities for such compensation, and the types of coverage, extent of coverage, and rates and
premiums would have been allowable had insurance been purchased to cover the risks. However,
provisions for self-insured liabilities which do not become payable for more than one year after the
provision is made shall not exceed the present value of the liability.
(b) Where an organization follows a consistent policy of expensing actual payments to, or on behalf of,
employees or former employees for unemployment compensation or workers' compensation, such
payments are allowable in the year of payment with the prior approval of the awarding agency,
provided they are allocated to all activities of the organization.
(4) Costs of insurance on the lives of trustees, officers, or other employees holding positions of similar
responsibility are allowable only to the extent that the insurance represents additional compensation.
The costs of such insurance when the organization is named as beneficiary are unallowable.
h. Organization-furnished automobiles. That portion of the cost of organization-furnished

automobiles that relates to personal use by employees (including transportation to and from work) is
unallowable as fringe benefit or indirect costs regardless of whether the cost is reported as taxable
income to the employees. These costs are allowable as direct costs to sponsored award when
necessary for the performance of the sponsored award and approved by awarding agencies.
41
i. Pension plan costs.
(1) Costs of the organization's pension plan which are incurred in accordance with the established
policies of the organization are allowable, provided:
(a) Such policies meet the test of reasonableness;
(b) The methods of cost allocation are not discriminatory;
(c) The cost assigned to each fiscal year is determined in accordance with generally accepted
accounting principles (GAAP), as prescribed in Accounting Principles Board Opinion No. 8 issued by
the American Institute of Certified Public Accountants; and
(d) The costs assigned to a given fiscal year are funded for all plan participants within six months after
the end of that year. However, increases to normal and past service pension costs caused by a delay in
funding the actuarial liability beyond 30 days after each quarter of the year to which such costs are
assignable are unallowable.
(2) Pension plan termination insurance premiums paid pursuant to the Employee Retirement Income
Security Act (ERISA) of 1974 (Pub. L. 93-406) are allowable. Late payment charges on such premiums
are unallowable.
(3) Excise taxes on accumulated funding deficiencies and other penalties imposed under ERISA are
unallowable.
j. Incentive compensation. Incentive compensation to employees based on cost reduction, or efficient

performance, suggestion awards, safety awards, etc., are allowable to the extent that the overall
compensation is determined to be reasonable and such costs are paid or accrued pursuant to an
agreement entered into in good faith between the organization and the employees before the services
were rendered, or pursuant to an established plan followed by the organization so consistently as to
imply, in effect, an agreement to make such payment.
k. Severance pay.
(1) Severance pay, also commonly referred to as dismissal wages, is a payment in addition to regular
salaries and wages, by organizations to workers whose employment is being terminated. Costs of
severance pay are allowable only to the extent that in each case, it is required by
(a) law,
(b) employer-employee agreement,
(c) established policy that constitutes, in effect, an implied agreement on the organization's part, or
(d) circumstances of the particular employment.
(2) Costs of severance payments are divided into two categories as follows:
(a) Actual normal turnover severance payments shall be allocated to all activities; or, where the
organization provides for a reserve for normal severances, such method will be acceptable if the charge
to current operations is reasonable in light of payments actually made for normal severances over a
42
representative past period, and if amounts charged are allocated to all activities of the organization.
(b) Abnormal or mass severance pay is of such a conjectural nature that measurement of costs by
means of an accrual will not achieve equity to both parties. Thus, accruals for this purpose are not
allowable. However, the Federal Government recognizes its obligation to participate, to the extent of
its fair share, in any specific payment. Thus, allowability will be considered on a case-by-case basis in the
event or occurrence.
(c) Costs incurred in certain severance pay packages (commonly known as "a golden parachute"
payment) which are in an amount in excess of the normal severance pay paid by the organization to an
employee upon termination of employment and are paid to the employee contingent upon a change in
management control over, or ownership of, the organization's assets are unallowable.
(d) Severance payments to foreign nationals employed by the organization outside the United States, to
the extent that the amount exceeds the customary or prevailing practices for the organization in the
United States are unallowable, unless they are necessary for the performance of Federal programs and
approved by awarding agencies.
(e) Severance payments to foreign nationals employed by the organization outside the United States
due to the termination of the foreign national as a result of the closing of, or curtailment of activities
by, the organization in that country, are unallowable, unless they are necessary for the performance of
Federal programs and approved by awarding agencies.
l. Training costs. See paragraph 49.
m. Support of salaries and wages.
(1) Charges to awards for salaries and wages, whether treated as direct costs or indirect costs, will be
based on documented payrolls approved by a responsible official(s) of the organization. The distribution
of salaries and wages to awards must be supported by personnel activity reports, as prescribed in
subparagraph (2), except when a substitute system has been approved in writing by the cognizant
agency. (See subparagraph E.2 of Attachment A.)
(2) Reports reflecting the distribution of activity of each employee must be maintained for all staff
members (professionals and nonprofessionals) whose compensation is charged, in whole or in part,
directly to awards. In addition, in order to support the allocation of indirect costs, such reports must
also be maintained for other employees whose work involves two or more functions or activities if a
distribution of their compensation between such functions or activities is needed in the determination
of the organization's indirect cost rate(s) (e.g., an employee engaged part-time in indirect cost activities
and part-time in a direct function). Reports maintained by non-profit organizations to satisfy these
requirements must meet the following standards:
(a) The reports must reflect an after-the-fact determination of the actual activity of each employee.
Budget estimates (i.e., estimates determined before the services are performed) do not qualify as
support for charges to awards.
(b) Each report must account for the total activity for which employees are compensated and which is
required in fulfillment of their obligations to the organization.
(c) The reports must be signed by the individual employee, or by a responsible supervisory official
having firsthand knowledge of the activities performed by the employee, that the distribution of activity
43
represents a reasonable estimate of the actual work performed by the employee during the periods
covered by the reports.
(d) The reports must be prepared at least monthly and must coincide with one or more pay periods.
(3) Charges for the salaries and wages of nonprofessional employees, in addition to the supporting
documentation described in subparagraphs (1) and (2), must also be supported by records indicating
the total number of hours worked each day maintained in conformance with Department of Labor
regulations implementing the Fair Labor Standards Act (FLSA) (29 CFR Part 516). For this purpose, the
term "nonprofessional employee" shall have the same meaning as "nonexempt employee," under FLSA.
(4) Salaries and wages of employees used in meeting cost sharing or matching requirements on awards
must be supported in the same manner as salaries and wages claimed for reimbursement from
awarding agencies.
9. Contingency provisions. Contributions to a contingency reserve or any similar provision made for events
the occurrence of which cannot be foretold with certainty as to time, intensity, or with an assurance of their
happening, are unallowable.
The term "contingency reserve" excludes self-insurance reserves (see Attachment B, paragraphs 8.g. (3) and
22.a(2)(d)); pension funds (see paragraph 8.i): and reserves for normal severance pay (see paragraph 8.k.)
10. Defense and prosecution of criminal and civil proceedings, claims, appeals and patent
infringement.
a. Definitions.
(1) Conviction, as used herein, means a judgment or a conviction of a criminal offense by any court of
competent jurisdiction, whether entered upon as a verdict or a plea, including a conviction due to a plea
of nolo contendere.
(2) Costs include, but are not limited to, administrative and clerical expenses; the cost of legal services,
whether performed by in-house or private counsel; and the costs of the services of accountants,
consultants, or others retained by the organization to assist it; costs of employees, officers and trustees,
and any similar costs incurred before, during, and after commencement of a judicial or administrative
proceeding that bears a direct relationship to the proceedings.
(3) Fraud, as used herein, means (i) acts of fraud corruption or attempts to defraud the Federal
Government or to corrupt its agents, (ii) acts that constitute a cause for debarment or suspension (as
specified in agency regulations), and (iii) acts which violate the False Claims Act, 31 U.S.C., sections
3729-3731, or the Anti-Kickback Act, 41 U.S.C., sections 51 and 54.
(4) Penalty does not include restitution, reimbursement, or compensatory damages.
(5) Proceeding includes an investigation.
b. (1) Except as otherwise described herein, costs incurred in connection with any criminal, civil or
administrative proceeding (including filing of a false certification) commenced by the Federal
Government, or a State, local or foreign government, are not allowable if the proceeding: (1) relates to
a violation of, or failure to comply with, a Federal, State, local or foreign statute or regulation by the
organization (including its agents and employees), and (2) results in any of the following dispositions:
44
(a) In a criminal proceeding, a conviction.
(b) In a civil or administrative proceeding involving an allegation of fraud or similar misconduct, a

determination of organizational liability.
(c) In the case of any civil or administrative proceeding, the imposition of a monetary penalty.
(d) A final decision by an appropriate Federal official to debar or suspend the organization, to rescind or
void an award, or to terminate an award for default by reason of a violation or failure to comply with a
law or regulation.
(e) A disposition by consent or compromise, if the action could have resulted in any of the dispositions
described in (a), (b), (c) or (d).
(2) If more than one proceeding involves the same alleged misconduct, the costs of all such proceedings
shall be unallowable if any one of them results in one of the dispositions shown in subparagraph b.(1).
c. If a proceeding referred to in subparagraph b is commenced by the Federal Government and is resolved

by consent or compromise pursuant to an agreement entered into by the organization and the Federal
Government, then the costs incurred by the organization in connection with such proceedings that are
otherwise not allowable under subparagraph b may be allowed to the extent specifically provided in
such agreement.
d. If a proceeding referred to in subparagraph b is commenced by a State, local or foreign government, the

authorized Federal official may allow the costs incurred by the organization for such proceedings, if such
authorized official determines that the costs were incurred as a result of (1) a specific term or condition
of a federally sponsored award, or (2) specific written direction of an authorized official of the
sponsoring agency.
e. Costs incurred in connection with proceedings described in subparagraph b, but which are not made
unallowable by that subparagraph, may be allowed by the Federal Government, but only to the extent
that:
(1) The costs are reasonable in relation to the activities required to deal with the proceeding and the
underlying cause of action;
(2) Payment of the costs incurred, as allowable and allocable costs, is not prohibited by any other
provision(s) of the sponsored award;
(3) The costs are not otherwise recovered from the Federal Government or a third party, either
directly as a result of the proceeding or otherwise; and,
(4) The percentage of costs allowed does not exceed the percentage determined by an authorized
Federal official to be appropriate, considering the complexity of the litigation, generally accepted
principles governing the award of legal fees in civil actions involving the United States as a party, and
such other factors as may be appropriate. Such percentage shall not exceed 80 percent. However, if an
agreement reached under subparagraph c has explicitly considered this 80 percent limitation and
permitted a higher percentage, then the full amount of costs resulting from that agreement shall be
allowable.
45
f. Costs incurred by the organization in connection with the defense of suits brought by its employees or
ex-employees under section 2 of the Major Fraud Act of 1988 (Pub. L. 100-700), including the cost of all
relief necessary to make such employee whole, where the organization was found liable or settled, are
unallowable.
g. Costs of legal, accounting, and consultant services, and related costs, incurred in connection with
defense against Federal Government claims or appeals, antitrust suits, or the prosecution of claims or
appeals against the Federal Government, are unallowable.
h. Costs of legal, accounting, and consultant services, and related costs, incurred in connection with patent
infringement litigation, are unallowable unless otherwise provided for in the sponsored awards.
i. Costs which may be unallowable under this paragraph, including directly associated costs, shall be
segregated and accounted for by the organization separately. During the pendency of any proceeding
covered by subparagraphs b and f, the Federal Government shall generally withhold payment of such
costs. However, if in the best interests of the Federal Government, the Federal Government may
provide for conditional payment upon provision of adequate security, or other adequate assurance, and
agreements by the organization to repay all unallowable costs, plus interest, if the costs are subsequently
determined to be unallowable.
11. Depreciation and use allowances.

a. Compensation for the use of buildings, other capital improvements, and equipment on hand may be
made through use allowance or depreciation. However, except as provided in Attachment B, paragraph
f, a combination of the two methods may not be used in connection with a single class of fixed assets
(e.g., buildings, office equipment, computer equipment, etc.).
b. The computation of use allowances or depreciation shall be based on the acquisition cost of the assets
involved. The acquisition cost of an asset donated to the non-profit organization by a third party shall be
its fair market value at the time of the donation.
c. The computation of use allowances or depreciation will exclude:
(1) The cost of land;
(2) Any portion of the cost of buildings and equipment borne by or donated by the Federal Government
irrespective of where title was originally vested or where it presently resides; and
(3) Any portion of the cost of buildings and equipment contributed by or for the non-profit organization
in satisfaction of a statutory matching requirement.
d. Where depreciation method is followed, the period of useful service (useful life) established in each case
for usable capital assets must take into consideration such factors as type of construction, nature of the
equipment used, technological developments in the particular program area, and the renewal and
replacement policies followed for the individual items or classes of assets involved. The method of
depreciation used to assign the cost of an asset (or group of assets) to accounting periods shall reflect
the pattern of consumption of the asset during its useful life.
In the absence of clear evidence indicating that the expected consumption of the asset will be
significantly greater or lesser in the early portions of its useful life than in the later portions, the straight-
line method shall be presumed to be the appropriate method.
46
Depreciation methods once used shall not be changed unless approved in advance by the cognizant
Federal agency. When the depreciation method is introduced for application to assets previously subject
to a use allowance, the combination of use allowances and depreciation applicable to such assets must
not exceed the total acquisition cost of the assets.
e. When the depreciation method is used for buildings, a building's shell may be segregated from each
building component (e.g., plumbing system, heating, and air conditioning system, etc.) and each item
depreciated over its estimated useful life; or the entire building (i.e., the shell and all components) may
be treated as a single asset and depreciated over a single useful life.
f. When the depreciation method is used for a particular class of assets, no depreciation may be allowed
on any such assets that, under subparagraph d, would be viewed as fully depreciated. However, a
reasonable use allowance may be negotiated for such assets if warranted after taking into consideration
the amount of depreciation previously charged to the Federal Government, the estimated useful life
remaining at time of negotiation, the effect of any increased maintenance charges or decreased efficiency
due to age, and any other factors pertinent to the utilization of the asset for the purpose contemplated.
g. Where the use allowance method is followed, the use allowance for buildings and improvement
(including land improvements, such as paved parking areas, fences, and sidewalks) will be computed at an
annual rate not exceeding two percent of acquisition cost.
The use allowance for equipment will be computed at an annual rate not exceeding six and two-thirds
percent of acquisition cost. When the use allowance method is used for buildings, the entire building
must be treated as a single asset; the building's components (e.g., plumbing system, heating and air
conditioning, etc.) cannot be segregated from the building's shell.
The two percent limitation, however, need not be applied to equipment which is merely attached or
fastened to the building but not permanently fixed to it and which is used as furnishings or decorations
or for specialized purposes (e.g., dentist chairs and dental treatment units, counters, laboratory benches
bolted to the floor, dishwashers, modular furniture, carpeting, etc.). Such equipment will be considered
as not being permanently fixed to the building if it can be removed without the need for costly or
extensive alterations or repairs to the building or the equipment. Equipment that meets these criteria
will be subject to the 6 2/3 percent equipment use allowance limitation.
h. Charges for use allowances or depreciation must be supported by adequate property records and
physical inventories must be taken at least once every two years (a statistical sampling basis is
acceptable) to ensure that assets exist and are usable and needed. When the depreciation method is
followed, adequate depreciation records indicating the amount of depreciation taken each period must
also be maintained.
12. Donations and contributions.

a. Contributions or donations rendered. Contributions or donations, including cash, property, and
services, made by the organization, regardless of the recipient, are unallowable.
b. Donated services received:
(1) Donated or volunteer services may be furnished to an organization by professional and technical
personnel, consultants, and other skilled and unskilled labor. The value of these services is not
reimbursable either as a direct or indirect cost. However, the value of donated services may be used to
meet cost sharing or matching requirements in accordance with the Common Rule.
47
(2)The value of donated services utilized in the performance of a direct cost activity shall, when material
in amount, be considered in the determination of the non-profit organization's indirect costs or rate(s)
and, accordingly, shall be allocated a proportionate share of applicable indirect costs when the following
exist:
(a) The aggregate value of the services is material;
(b) The services are supported by a significant amount of the indirect costs incurred by the non-profit
organization; and
(c) The direct cost activity is not pursued primarily for the benefit of the Federal Government.
(3) In those instances where there is no basis for determining the fair market value of the services
rendered, the recipient and the cognizant agency shall negotiate an appropriate allocation of indirect
cost to the services.
(4) Where donated services directly benefit a project supported by an award, the indirect costs
allocated to the services will be considered as a part of the total costs of the project. Such indirect costs
may be reimbursed under the award or used to meet cost sharing or matching requirements.
(5) The value of the donated services may be used to meet cost sharing or matching requirements
under conditions described in Sec.__.23 of Circular A-110. Where donated services are treated as
indirect costs, indirect cost rates will separate the value of the donations so that reimbursement will not
be made.
c. Donated goods or space.
(1) Donated goods; i.e., expendable personal property/supplies, and donated use of space may be
furnished to a non-profit organization. The value of the goods and space is not reimbursable either as a
direct or indirect cost.
(2) The value of the donations may be used to meet cost sharing or matching share requirements under
the conditions described in Circular A-110. Where donations are treated as indirect costs, indirect cost
rates will separate the value of the donations so that reimbursement will not be made.
13. Employee morale, health, and welfare costs.

a. The costs of employee information publications, health or first-aid clinics and/or infirmaries, recreational
activities, employee counseling services, and any other expenses incurred in accordance with the non-
profit organization's established practice or custom for the improvement of working conditions,
employer-employee relations, employee morale, and employee performance are allowable.
b. Such costs will be equitably apportioned to all activities of the non-profit organization. Income generated
from any of these activities will be credited to the cost thereof unless such income has been irrevocably
set over to employee welfare organizations.
14. Entertainment costs. Costs of entertainment, including amusement, diversion, and social activities and
any costs directly associated with such costs (such as tickets to shows or sports events, meals, lodging,
rentals, transportation, and gratuities) are unallowable.
15. Equipment and other capital expenditures.
48
a. For purposes of this subparagraph, the following definitions apply:
(1) "Capital Expenditures" means expenditures for the acquisition cost of capital assets (equipment,
buildings, land), or expenditures to make improvements to capital assets that materially increase their
value or useful life. Acquisition cost means the cost of the asset including the cost to put it in place.
Acquisition cost for equipment, for example, means the net invoice price of the equipment, including the
cost of any modifications, attachments, accessories, or auxiliary apparatus necessary to make it usable
for the purpose for which it is acquired. Ancillary charges, such as taxes, duty, and protective in transit
insurance, freight, and installation may be included in, or excluded from the acquisition cost in
accordance with the non-profit organization's regular accounting practices.
(2) "Equipment" means an article of nonexpendable, tangible personal property having a useful life of
more than one year and an acquisition cost which equals or exceeds the lesser of the capitalization level
established by the non-profit organization for financial statement purposes, or $5000.
(3) "Special purpose equipment" means equipment which is used only for research, medical, scientific, or
other technical activities. Examples of special purpose equipment include microscopes, x-ray machines,
surgical instruments, and spectrometers.
(4) "General purpose equipment" means equipment, which is not limited to research, medical, scientific
or other technical activities. Examples include office equipment and furnishings, modular offices,
telephone networks, information technology equipment and systems, air conditioning equipment,
reproduction and printing equipment, and motor vehicles.
b. The following rules of allowability shall apply to equipment and other capital expenditures:
(1) Capital expenditures for general purpose equipment, buildings, and land are unallowable as direct
charges, except where approved in advance by the awarding agency.
(2) Capital expenditures for special purpose equipment are allowable as direct costs, provided that
items with a unit cost of $5000 or more have the prior approval of the awarding agency.
(3) Capital expenditures for improvements to land, buildings, or equipment which materially increase
their value or useful life are unallowable as a direct cost except with the prior approval of the awarding
agency.
(4) When approved as a direct charge pursuant to paragraph 15.b.(1), (2), and (3) above, capital
expenditures will be charged in the period in which the expenditure is incurred, or as otherwise
determined appropriate by and negotiated with the awarding agency.
(5) Equipment and other capital expenditures are unallowable as indirect costs. However, see
Attachment B, paragraph 11., Depreciation and use allowance, for rules on the allowability of use
allowances or depreciation on buildings, capital improvements, and equipment. Also, see Attachment B,
paragraph 43., Rental costs of buildings and equipment, for rules on the allowability of rental costs for
land, buildings, and equipment.
(6) The unamortized portion of any equipment written off as a result of a change in capitalization levels
may be recovered by continuing to claim the otherwise allowable use allowances or depreciation on the
equipment, or by amortizing the amount to be written off over a period of years negotiated with the
cognizant agency.
49
16. Fines and penalties. Costs of fines and penalties resulting from violations of, or failure of the
organization to comply with Federal, State, and local laws and regulations are unallowable except when
incurred as a result of compliance with specific provisions of an award or instructions in writing from the
awarding agency.
17. Fund raising and investment management costs.

a. Costs of organized fund raising, including financial campaigns, endowment drives, solicitation of gifts and
bequests, and similar expenses incurred solely to raise capital or obtain contributions are unallowable.
b. Costs of investment counsel and staff and similar expenses incurred solely to enhance income from
investments are unallowable.
c. Fund raising and investment activities shall be allocated an appropriate share of indirect costs under the
conditions described in subparagraph B.3 of Attachment A.
18. Gains and losses on depreciable assets.

a. (1) Gains and losses on sale, retirement, or other disposition of depreciable property shall be included
in the year in which they occur as credits or charges to cost grouping(s) in which the depreciation
applicable to such property was included. The amount of the gain or loss to be included as a credit or
charge to the appropriate cost grouping(s) shall be the difference between the amount realized on the
property and the depreciated basis of the property.
(2) Gains and losses on the disposition of depreciable property shall not be recognized as a separate
credit or charge under the following conditions:
(a) The gain or loss is processed through a depreciation account and is reflected in the depreciation
allowable under paragraph 11.
(b) The property is given in exchange as part of the purchase price of a similar item and the gain or loss
is taken into account in determining the depreciation cost basis of the new item.
(c) A loss results from the failure to maintain permissible insurance, except as otherwise provided in
Attachment B, paragraph 22.
(d) Compensation for the use of the property was provided through use allowances in lieu of
depreciation in accordance with paragraph 9.
(e) Gains and losses arising from mass or extraordinary sales, retirements, or other dispositions shall be
considered on a case-by-case basis.
b. Gains or losses of any nature arising from the sale or exchange of property other than the property
covered in subparagraph a shall be excluded in computing award costs.
19. Goods or services for personal use. Costs of goods or services for personal use of the
organization's employees are unallowable regardless of whether the cost is reported as taxable income
to the employees.
20. Housing and personal living expenses.
50
a. Costs of housing (e.g., depreciation, maintenance, utilities, furnishings, rent, etc.), housing allowances and
personal living expenses for/of the organization's officers are unallowable as fringe benefit or indirect
costs regardless of whether the cost is reported as taxable income to the employees. These costs are
allowable as direct costs to sponsored award when necessary for the performance of the sponsored
award and approved by awarding agencies.
b. The term "officers" includes current and past officers and employees.
21. Idle facilities and idle capacity.

a. As used in this section the following terms have the meanings set forth below:
(1) "Facilities" means land and buildings or any portion thereof, equipment individually or collectively, or
any other tangible capital asset, wherever located, and whether owned or leased by the non-profit
organization.
(2) "Idle facilities" means completely unused facilities that are excess to the non-profit organization's
current needs.
(3) "Idle capacity" means the unused capacity of partially used facilities. It is the difference between: (a)
that which a facility could achieve under 100 percent operating time on a one-shift basis less operating
interruptions resulting from time lost for repairs, setups, unsatisfactory materials, and other normal
delays; and (b) the extent to which the facility was actually used to meet demands during the accounting
period. A multi-shift basis should be used if it can be shown that this amount of usage would normally be
expected for the type of facility involved.
(4) "Cost of idle facilities or idle capacity" means costs such as maintenance, repair, housing, rent, and
other related costs, e.g., insurance, interest, property taxes and depreciation or use allowances.
b. The costs of idle facilities are unallowable except to the extent that:
(1) They are necessary to meet fluctuations in workload; or
(2) Although not necessary to meet fluctuations in workload, they were necessary when acquired and
are now idle because of changes in program requirements, efforts to achieve more economical
operations, reorganization, termination, or other causes which could not have been reasonably
foreseen. Under the exception stated in this subparagraph, costs of idle facilities are allowable for a
reasonable period of time, ordinarily not to exceed one year, depending on the initiative taken to use,
lease, or dispose of such facilities.
c. The costs of idle capacity are normal costs of doing business and are a factor in the normal fluctuations
of usage or indirect cost rates from period to period. Such costs are allowable, provided that the
capacity is reasonably anticipated to be necessary or was originally reasonable and is not subject to
reduction or elimination by use on other Federal awards, subletting, renting, or sale, in accordance with
sound business, economic, or security practices. Widespread idle capacity throughout an entire facility
or among a group of assets having substantially the same function may be considered idle facilities.
22. Insurance and indemnification.

a. Insurance includes insurance which the organization is required to carry, or which is approved, under
the terms of the award and any other insurance which the organization maintains in connection with the
51
general conduct of its operations. This paragraph does not apply to insurance which represents fringe
benefits for employees (see subparagraphs 8.g and 8.i(2)).
(1) Costs of insurance required or approved, and maintained, pursuant to the award are allowable.
(2) Costs of other insurance maintained by the organization in connection with the general conduct of
its operations are allowable subject to the following limitations:
(a) Types and extent of coverage shall be in accordance with sound business practice and the rates and
premiums shall be reasonable under the circumstances.
(b) Costs allowed for business interruption or other similar insurance shall be limited to exclude
coverage of management fees.
(c) Costs of insurance or of any provisions for a reserve covering the risk of loss or damage to Federal
property are allowable only to the extent that the organization is liable for such loss or damage.
(d) Provisions for a reserve under a self-insurance program are allowable to the extent that types of
coverage, extent of coverage, rates, and premiums would have been allowed had insurance been
purchased to cover the risks. However, provision for known or reasonably estimated self-insured
liabilities, which do not become payable for more than one year after the provision is made, shall not
exceed the present value of the liability.
(e) Costs of insurance on the lives of trustees, officers, or other employees holding positions of similar
responsibilities are allowable only to the extent that the insurance represents additional compensation
(see subparagraph 8.g(4)). The cost of such insurance when the organization is identified as the
beneficiary is unallowable.
(f) Insurance against defects. Costs of insurance with respect to any costs incurred to correct defects in
the organization's materials or workmanship are unallowable.
(g) Medical liability (malpractice) insurance. Medical liability insurance is an allowable cost of Federal
research programs only to the extent that the Federal research programs involve human subjects or
training of participants in research techniques. Medical liability insurance costs shall be treated as a
direct cost and shall be assigned to individual projects based on the manner in which the insurer
allocates the risk to the population covered by the insurance.
(3) Actual losses which could have been covered by permissible insurance (through the purchase of
insurance or a self-insurance program) are unallowable unless expressly provided for in the award,
except:
(a) Costs incurred because of losses not covered under nominal deductible insurance coverage provided in
keeping with sound business practice are allowable.
(b) Minor losses not covered by insurance, such as spoilage, breakage, and disappearance of supplies,
which occur in the ordinary course of operations, are allowable.
b. Indemnification includes securing the organization against liabilities to third persons and any other loss
or damage, not compensated by insurance or otherwise. The Federal Government is obligated to
indemnify the organization only to the extent expressly provided in the award.
52
23. Interest.
a. Costs incurred for interest on borrowed capital, temporary use of endowment funds, or the use of the
non-profit organization’s own funds, however represented, are unallowable. However, interest on debt
incurred after September 29, 1995 to acquire or replace capital assets (including renovations,
alterations, equipment, land, and capital assets acquired through capital leases), acquired after September
29, 1995 and used in support of Federal awards is allowable, provided that:
(1) For facilities acquisitions (excluding renovations and alterations) costing over $10 million where the
Federal Government's reimbursement is expected to equal or exceed 40 percent of an asset's cost, the
non-profit organization prepares, prior to the acquisition or replacement of the capital asset(s), a
justification that demonstrates the need for the facility in the conduct of federally sponsored activities.
Upon request, the needs justification must be provided to the Federal agency with cost cognizance
authority as a prerequisite to the continued allowability of interest on debt and depreciation related to
the facility. The needs justification for the acquisition of a facility should include, at a minimum, the
following:
(a) A statement of purpose and justification for facility acquisition or replacement
(b) A statement as to why current facilities are not adequate
(c) A statement of planned future use of the facility
(d) A description of the financing agreement to be arranged for the facility
(e) A summary of the building contract with estimated cost information and statement of source and use
of funds
(f) A schedule of planned occupancy dates
(2) For facilities costing over $500,000, the non-profit organization prepares, prior to the acquisition or
replacement of the facility, a lease/purchase analysis in accordance with the provisions of Sec. __.30
through __.37 of Circular A-110, which shows that a financed purchase or capital lease is less costly to
the organization than other leasing alternatives, on a net present value basis. Discount rates used should
be equal to the non-profit organization's anticipated interest rates and should be no higher than the fair
market rate available to the non-profit organization from an unrelated ("arm's length") third-party. The
lease/purchase analysis shall include a comparison of the net present value of the projected total cost
comparisons of both alternatives over the period the asset is expected to be used by the non-profit
organization. The cost comparisons associated with purchasing the facility shall include the estimated
purchase price, anticipated operating and maintenance costs (including property taxes, if applicable) not
included in the debt financing, less any estimated asset salvage value at the end of the period defined
above. The cost comparison for a capital lease shall include the estimated total lease payments, any
estimated bargain purchase option, operating and maintenance costs, and taxes not included in the
capital leasing arrangement, less any estimated credits due under the lease at the end of the period
defined above. Projected operating lease costs shall be based on the anticipated cost of leasing
comparable facilities at fair market rates under rental agreements that would be renewed or
reestablished over the period defined above, and any expected maintenance costs and allowable
property taxes to be borne by the non-profit organization directly or as part of the lease arrangement.
(3) The actual interest cost claimed is predicated upon interest rates that are no higher than the fair
market rate available to the non-profit organization from an unrelated ("arm's length") third party.
53
(4) Investment earnings, including interest income, on bond or loan principal, pending payment of the
construction or acquisition costs, are used to offset allowable interest cost. Arbitrage earnings
reportable to the Internal Revenue Service are not required to be offset against allowable interest costs.
(5) Reimbursements are limited to the least costly alternative based on the total cost analysis required
under subparagraph (b). For example, if an operating lease is determined to be less costly than
purchasing through debt financing, then reimbursement is limited to the amount determined if leasing
had been used. In all cases where a lease/purchase analysis is performed, Federal reimbursement shall be
based upon the least expensive alternative.
(6) Non-profit organizations are also subject to the following conditions:
(a) Interest on debt incurred to finance or refinance assets acquired before or reacquired after September
29, 1995, is not allowable.
(b) Interest attributable to fully depreciated assets is unallowable.
(c) For debt arrangements over $1 million, unless the non-profit organization makes an initial equity
contribution to the asset purchase of 25 percent or more, non-profit organizations shall reduce claims
for interest expense by an amount equal to imputed interest earnings on excess cash flow, which is to
be calculated as follows. Annually, non-profit organizations shall prepare a cumulative (from the
inception of the project) report of monthly cash flows that includes inflows and outflows, regardless of
the funding source. Inflows consist of depreciation expense, amortization of capitalized construction
interest, and annual interest expense. For cash flow calculations, the annual inflow figures shall be
divided by the number of months in the year (usually 12) that the building is in service for monthly
amounts. Outflows consist of initial equity contributions, debt principal payments (less the pro rata
share attributable to the unallowable costs of land) and interest payments. Where cumulative inflows
exceed cumulative outflows, interest shall be calculated on the excess inflows for that period and be
treated as a reduction to allowable interest expense. The rate of interest to be used to compute
earnings on excess cash flows shall be the three month Treasury Bill closing rate as of the last business
day of that month.
(d) Substantial relocation of federally sponsored activities from a facility financed by indebtedness, the
cost of which was funded in whole or part through Federal reimbursements, to another facility prior to
the expiration of a period of 20 years requires notice to the Federal cognizant agency. The extent of the
relocation, the amount of the Federal participation in the financing, and the depreciation and interest
charged to date may require negotiation and/or downward adjustments of replacement space charged to
Federal programs in the future.
(e) The allowable costs to acquire facilities and equipment are limited to a fair market value available to
the non-profit organization from an unrelated ("arm's length") third party.
b. For non-profit organizations subject to "full coverage"' under the Cost Accounting Standards (CAS) as
defined at 48 CFR 9903.201, the interest allowability provisions of subparagraph a do not apply. Instead,
these organizations' sponsored agreements are subject to CAS 414 (48 CFR 9903.414), cost of money
as an element of the cost of facilities capital, and CAS 417 (48 CFR 9903.417), cost of money as an
element of the cost of capital assets under construction.
c. The following definitions are to be used for purposes of this paragraph:
54
(1) Re-acquired assets means assets held by the non-profit organization prior to September 29, 1995
that have again come to be held by the organization, whether through repurchase or refinancing. It does
not include assets acquired to replace older assets.
(2) Initial equity contribution means the amount or value of contributions made by non-profit
organizations for the acquisition of the asset or prior to occupancy of facilities.
(3) Asset costs means the capitalizable costs of an asset, including construction costs, acquisition costs,
and other such costs capitalized in accordance with GAAP.
24. Labor relations costs. Costs incurred in maintaining satisfactory relations between the organization and
its employees, including costs of labor management committees, employee publications, and other related
activities are allowable.
25. Lobbying.
a. Notwithstanding other provisions of this Circular, costs associated with the following activities are
unallowable:
(1) Attempts to influence the outcomes of any Federal, State, or local election, referendum, initiative, or
similar procedure, through in kind or cash contributions, endorsements, publicity, or similar activity;
(2) Establishing, administering, contributing to, or paying the expenses of a political party, campaign,
political action committee, or other organization established for the purpose of influencing the
outcomes of elections;
(3) Any attempt to influence: (i) The introduction of Federal or State legislation; or (ii) the enactment or
modification of any pending Federal or State legislation through communication with any member or
employee of the Congress or State legislature (including efforts to influence State or local officials to
engage in similar lobbying activity), or with any Government official or employee in connection with a
decision to sign or veto enrolled legislation;
(4) Any attempt to influence: (i) The introduction of Federal or State legislation; or (ii) the enactment or
modification of any pending Federal or State legislation by preparing, distributing or using publicity or
propaganda, or by urging members of the general public or any segment thereof to contribute to or
participate in any mass demonstration, march, rally, fundraising drive, lobbying campaign or letter writing
or telephone campaign; or
(5) Legislative liaison activities, including attendance at legislative sessions or committee hearings,
gathering information regarding legislation, and analyzing the effect of legislation, when such activities are
carried on in support of or in knowing preparation for an effort to engage in unallowable lobbying.
b. The following activities are excepted from the coverage of subparagraph a:
(1) Providing a technical and factual presentation of information on a topic directly related to the
performance of a grant, contract or other agreement through hearing testimony, statements or letters
to the Congress or a State legislature, or subdivision, member, or cognizant staff member thereof, in
response to a documented request (including a Congressional Record notice requesting testimony or
statements for the record at a regularly scheduled hearing) made by the recipient member, legislative
body or subdivision, or a cognizant staff member thereof; provided such information is readily obtainable
and can be readily put in deliverable form; and further provided that costs under this section for travel,
lodging or meals are unallowable unless incurred to offer testimony at a regularly scheduled
55
Congressional hearing pursuant to a written request for such presentation made by the Chairman or
Ranking Minority Member of the Committee or Subcommittee conducting such hearing.
(2) Any lobbying made unallowable by subparagraph a(3) to influence State legislation in order to
directly reduce the cost, or to avoid material impairment of the organization's authority to perform the
grant, contract, or other agreement.
(3) Any activity specifically authorized by statute to be undertaken with funds from the grant, contract,
or other agreement.
c. (1) When an organization seeks reimbursement for indirect costs, total lobbying costs shall be
separately identified in the indirect cost rate proposal, and thereafter treated as other unallowable
activity costs in accordance with the procedures of subparagraph B.3 of Attachment A.
(2) Organizations shall submit, as part of the annual indirect cost rate proposal, a certification that the
requirements and standards of this paragraph have been complied with.
(3) Organizations shall maintain adequate records to demonstrate that the determination of costs as
being allowable or unallowable pursuant to paragraph 25 complies with the requirements of this
Circular.
(4) Time logs, calendars, or similar records shall not be required to be created for purposes of
complying with this paragraph during any particular calendar month when: (1) the employee engages in
lobbying (as defined in subparagraphs (a) and (b)) 25 percent or less of the employee's compensated
hours of employment during that calendar month, and (2) within the preceding five-year period, the
organization has not materially misstated allowable or unallowable costs of any nature, including
legislative lobbying costs. When conditions (1) and (2) are met, organizations are not required to
establish records to support the allowabliliy of claimed costs in addition to records already required or
maintained. Also, when conditions (1) and (2) are met, the absence of time logs, calendars, or similar
records will not serve as a basis for disallowing costs by contesting estimates of lobbying time spent by
employees during a calendar month.
(5) Agencies shall establish procedures for resolving in advance, in consultation with OMB, any
significant questions or disagreements concerning the interpretation or application of paragraph 25. Any
such advance resolution shall be binding in any subsequent settlements, audits or investigations with
respect to that grant or contract for purposes of interpretation of this Circular; provided, however, that
this shall not be construed to prevent a contractor or grantee from contesting the lawfulness of such a
determination.
d. Executive lobbying costs. Costs incurred in attempting to improperly influence either directly or
indirectly, an employee or officer of the Executive Branch of the Federal Government to give
consideration or to act regarding a sponsored agreement or a regulatory matter are unallowable.
Improper influence means any influence that induces or tends to induce a Federal employee or officer to
give consideration or to act regarding a federally sponsored agreement or regulatory matter on any
basis other than the merits of the matter.
26. Losses on other sponsored agreements or contracts. Any excess of costs over income on any award
is unallowable as a cost of any other award. This includes, but is not limited to, the organization's contributed
portion by reason of cost sharing agreements or any under-recoveries through negotiation of lump sums for,
or ceilings on, indirect costs.
56
27. Maintenance and repair costs. Costs incurred for necessary maintenance, repair, or upkeep of
buildings and equipment (including Federal property unless otherwise provided for) which neither add to the
permanent value of the property nor appreciably prolong its intended life, but keep it in an efficient operating
condition, are allowable. Costs incurred for improvements which add to the permanent value of the buildings
and equipment or appreciably prolong their intended life shall be treated as capital expenditures (see
paragraph 15).
28. Materials and supplies costs.

a. Costs incurred for materials, supplies, and fabricated parts necessary to carry out a Federal award are
allowable.
b. Purchased materials and supplies shall be charged at their actual prices, net of applicable credits.
Withdrawals from general stores or stockrooms should be charged at their actual net cost under any
recognized method of pricing inventory withdrawals, consistently applied. Incoming transportation
charges are a proper part of materials and supplies costs.
c. Only materials and supplies actually used for the performance of a Federal award may be charged as
direct costs.
d. Where federally donated or furnished materials are used in performing the Federal award, such
materials will be used without charge.
29. Meetings and conferences. Costs of meetings and conferences, the primary purpose of which is the
dissemination of technical information, are allowable. This includes costs of meals, transportation, rental of
facilities, speakers' fees, and other items incidental to such meetings or conferences. But see Attachment B,
paragraphs 14., Entertainment costs, and 33., Participant support costs.
30. Memberships, subscriptions, and professional activity costs.

a. Costs of the non-profit organization’s membership in business, technical, and professional organizations
are allowable.
b. Costs of the non-profit organization’s subscriptions to business, professional, and technical periodicals
are allowable.
c. Costs of membership in any civic or community organization are allowable with prior approval by
Federal cognizant agency.
d. Costs of membership in any country club or social or dining club or organization are unallowable.
31. Organization costs. Expenditures, such as incorporation fees, brokers' fees, fees to promoters,
organizers or management consultants, attorneys, accountants, or investment counselors, whether or not
employees of the organization, in connection with establishment or reorganization of an organization, are
unallowable except with prior approval of the awarding agency.
32. Page charges in professional journals. Page charges for professional journal publications are allowable
as a necessary part of research costs, where:
a. The research papers report work supported by the Federal Government; and
57
b. The charges are levied impartially on all research papers published by the journal, whether or not by
federally sponsored authors.
33. Participant support costs. Participant support costs are direct costs for items such as stipends or
subsistence allowances, travel allowances, and registration fees paid to or on behalf of participants or trainees
(but not employees) in connection with meetings, conferences, symposia, or training projects. These costs
are allowable with the prior approval of the awarding agency.
34. Patent costs.

a. The following costs relating to patent and copyright matters are allowable: (i) cost of preparing
disclosures, reports, and other documents required by the Federal award and of searching the art to the
extent necessary to make such disclosures; (ii) cost of preparing documents and any other patent costs
in connection with the filing and prosecution of a United States patent application where title or royalty-
free license is required by the Federal Government to be conveyed to the Federal Government; and (iii)
general counseling services relating to patent and copyright matters, such as advice on patent and
copyright laws, regulations, clauses, and employee agreements (but see paragraphs 37., Professional
services costs, and 44., Royalties and other costs for use of patents and copyrights).
b. The following costs related to patent and copyright matter are unallowable:
(1) Cost of preparing disclosures, reports, and other documents and of searching the art to the extent
necessary to make disclosures not required by the award
(2) Costs in connection with filing and prosecuting any foreign patent application, or any United States
patent application, where the Federal award does not require conveying title or a royalty-free license to
the Federal Government (but see paragraph 45., Royalties and other costs for use of patents and
copyrights).
35. Plant and homeland security costs. Necessary and reasonable expenses incurred for routine and
homeland security to protect facilities, personnel, and work products are allowable. Such costs include, but
are not limited to, wages and uniforms of personnel engaged in security activities; equipment; barriers;
contractual security services; consultants; etc. Capital expenditures for homeland and plant security purposes
are subject to paragraph 15., Equipment and other capital expenditures, of this Circular.
36. Pre-agreement costs. Pre-award costs are those incurred prior to the effective date of the award
directly pursuant to the negotiation and in anticipation of the award where such costs are necessary to
comply with the proposed delivery schedule or period of performance. Such costs are allowable only to the
extent that they would have been allowable if incurred after the date of the award and only with the written
approval of the awarding agency.
37. Professional services costs.

a. Costs of professional and consultant services rendered by persons who are members of a particular
profession or possess a special skill, and who are not officers or employees of the non-profit
organization, are allowable, subject to subparagraphs b and c when reasonable in relation to the services
rendered and when not contingent upon recovery of the costs from the Federal Government.
In addition, legal and related services are limited under Attachment B, paragraph 10.
b. In determining the allowability of costs in a particular case, no single factor or any special combination of
factors is necessarily determinative. However, the following factors are relevant:
58
(1) The nature and scope of the service rendered in relation to the service required.
(2) The necessity of contracting for the service, considering the non-profit organization's capability in
the particular area.
(3) The past pattern of such costs, particularly in the years prior to Federal awards.
(4) The impact of Federal awards on the non-profit organization's business (i.e., what new problems
have arisen).
(5) Whether the proportion of Federal work to the non-profit organization's total business is such as to
influence the non-profit organization in favor of incurring the cost, particularly where the services
rendered are not of a continuing nature and have little relationship to work under Federal grants and
contracts.
(6) Whether the service can be performed more economically by direct employment rather than
contracting.
(7) The qualifications of the individual or concern rendering the service and the customary fees charged,
especially on non-Federal awards.
(8) Adequacy of the contractual agreement for the service (e.g., description of the service, estimate of
time required, rate of compensation, and termination provisions).
c. In addition to the factors in subparagraph b, retainer fees to be allowable must be supported by

evidence of bona fide services available or rendered
38. Publication and printing costs.
a. Publication costs include the costs of printing (including the processes of composition, plate-making,
press work, binding, and the end products produced by such processes), distribution, promotion,
mailing, and general handling. Publication costs also include page charges in professional publications.
b. If these costs are not identifiable with a particular cost objective, they should be allocated as indirect
costs to all benefiting activities of the non-profit organization.
c. Page charges for professional journal publications are allowable as a necessary part of research costs
where:
(1) The research papers report work supported by the Federal Government: and
(2) The charges are levied impartially on all research papers published by the journal, whether or not by
federally sponsored authors.
39. Rearrangement and alteration costs. Costs incurred for ordinary or normal rearrangement and
alteration of facilities are allowable. Special arrangement and alteration costs incurred specifically for the
project are allowable with the prior approval of the awarding agency.
40. Reconversion costs. Costs incurred in the restoration or rehabilitation of the non-profit organization's
facilities to approximately the same condition existing immediately prior to commencement of Federal
awards, less costs related to normal wear and tear, are allowable.
41. Recruiting costs.
59
a. Subject to subparagraphs b, c, and d, and provided that the size of the staff recruited and maintained is in
keeping with workload requirements, costs of "help wanted" advertising, operating costs of an
employment office necessary to secure and maintain an adequate staff, costs of operating an aptitude
and educational testing program, travel costs of employees while engaged in recruiting personnel, travel
costs of applicants for interviews for prospective employment, and relocation costs incurred incident to
recruitment of new employees, are allowable to the extent that such costs are incurred pursuant to a
well-managed recruitment program. Where the organization uses employment agencies, costs that are
not in excess of standard commercial rates for such services are allowable.
b. In publications, costs of help wanted advertising that includes color, includes advertising material for
other than recruitment purposes, or is excessive in size (taking into consideration recruitment purposes
for which intended and normal organizational practices in this respect), are unallowable.
c. Costs of help wanted advertising, special emoluments, fringe benefits, and salary allowances incurred to
attract professional personnel from other organizations that do not meet the test of reasonableness or
do not conform with the established practices of the organization, are unallowable.
d. Where relocation costs incurred incident to recruitment of a new employee have been allowed either
as an allocable direct or indirect cost, and the newly hired employee resigns for reasons within his
control within twelve months after being hired, the organization will be required to refund or credit
such relocation costs to the Federal Government.
42. Relocation costs.

a. Relocation costs are costs incident to the permanent change of duty assignment (for an indefinite period
or for a stated period of not less than 12 months) of an existing employee or upon recruitment of a new
employee. Relocation costs are allowable, subject to the limitation described in subparagraphs b, c, and
d, provided that:
(1) The move is for the benefit of the employer.
(2) Reimbursement to the employee is in accordance with an established written policy consistently
followed by the employer.
(3) The reimbursement does not exceed the employee's actual (or reasonably estimated) expenses.
b. Allowable relocation costs for current employees are limited to the following:
(1) The costs of transportation of the employee, members of his immediate family and his household,
and personal effects to the new location.
(2) The costs of finding a new home, such as advance trips by employees and spouses to locate living
quarters and temporary lodging during the transition period, up to maximum period of 30 days,
including advance trip time.
(3) Closing costs, such as brokerage, legal, and appraisal fees, incident to the disposition of the
employee's former home. These costs, together with those described in (4), are limited to 8 percent of
the sales price of the employee's former home.
(4) The continuing costs of ownership of the vacant former home after the settlement or lease date of
the employee's new permanent home, such as maintenance of buildings and grounds (exclusive of fixing
up expenses), utilities, taxes, and property insurance.
60
(5) Other necessary and reasonable expenses normally incident to relocation, such as the costs of
canceling an unexpired lease, disconnecting and reinstalling household appliances, and purchasing
insurance against loss of or damages to personal property. The cost of canceling an unexpired lease is
limited to three times the monthly rental.
c. Allowable relocation costs for new employees are limited to those described in (1) and (2) of
subparagraph b. When relocation costs incurred incident to the recruitment of new employees have
been allowed either as a direct or indirect cost and the employee resigns for reasons within his control
within 12 months after hire, the organization shall refund or credit the Federal Government for its share
of the cost. However, the costs of travel to an overseas location shall be considered travel costs in
accordance with paragraph 50 and not relocation costs for the purpose of this paragraph if dependents
are not permitted at the location for any reason and the costs do not include costs of transporting
household goods.
d. The following costs related to relocation are unallowable:
(1) Fees and other costs associated with acquiring a new home.
(2) A loss on the sale of a former home.
(3) Continuing mortgage principal and interest payments on a home being sold.
(4) Income taxes paid by an employee related to reimbursed relocation costs.
43. Rental costs of buildings and equipment.

a. Subject to the limitations described in subparagraphs b. through d. of this paragraph 43, rental costs are
allowable to the extent that the rates are reasonable in light of such factors as: rental costs of
comparable property, if any; market conditions in the area; alternatives available; and, the type, life
expectancy, condition, and value of the property leased. Rental arrangements should be reviewed
periodically to determine if circumstances have changed and other options are available.
b. Rental costs under "sale and lease back" arrangements are allowable only up to the amount that would
be allowed had the non-profit organization continued to own the property. This amount would include
expenses such as depreciation or use allowance, maintenance, taxes, and insurance.
c. Rental costs under "less-than-arms-length" leases are allowable only up to the amount (as explained in
subparagraph b. of this paragraph 43.) that would be allowed had title to the property vested in the non-
profit organization. For this purpose, a less-than-arms-length lease is one under which one party to the
lease agreement is able to control or substantially influence the actions of the other. Such leases include,
but are not limited to those between (i) divisions of a non-profit organization; (ii) non-profit
organizations under common control through common officers, directors, or members; and (iii) a non-
profit organization and a director, trustee, officer, or key employee of the non-profit organization or his
immediate family, either directly or through corporations, trusts, or similar arrangements in which they
hold a controlling interest. For example, a non-profit organization may establish a separate corporation
for the sole purpose of owning property and leasing it back to the non-profit organization.
d. Rental costs under leases which are required to be treated as capital leases under GAAP are allowable
only up to the amount (as explained in subparagraph b) that would be allowed had the non-profit
organization purchased the property on the date the lease agreement was executed. The provisions of
Financial Accounting Standards Board Statement 13, Accounting for Leases, shall be used to determine
61
whether a lease is a capital lease. Interest costs related to capital leases are allowable to the extent they
meet the criteria in subparagraph 23. Unallowable costs include amounts paid for profit, management
fees, and taxes that would not have been incurred had the non-profit organization purchased the facility.
44. Royalties and other costs for use of patents and copyrights.
a. Royalties on a patent or copyright or amortization of the cost of acquiring by purchase a copyright,
patent, or rights thereto, necessary for the proper performance of the award are allowable unless:
(1) The Federal Government has a license or the right to free use of the patent or copyright.
(2) The patent or copyright has been adjudicated to be invalid, or has been administratively determined
to be invalid.
(3) The patent or copyright is considered to be unenforceable.
(4) The patent or copyright is expired.
b. Special care should be exercised in determining reasonableness where the royalties may have arrived at
as a result of less-than-arm's-length bargaining, e.g.:
(1) Royalties paid to persons, including corporations, affiliated with the non-profit organization.
(2) Royalties paid to unaffiliated parties, including corporations, under an agreement entered into in
contemplation that a Federal award would be made.
(3) Royalties paid under an agreement entered into after an award is made to a non-profit organization.
c. In any case involving a patent or copyright formerly owned by the non-profit organization, the amount
of royalty allowed should not exceed the cost which would have been allowed had the non-profit
organization retained title thereto.
45. Selling and marketing. Costs of selling and marketing any products or services of the non-profit
organization are unallowable (unless allowed under Attachment B, paragraph 1. as allowable public relations
cost. However, these costs are allowable as direct costs, with prior approval by awarding agencies, when
they are necessary for the performance of Federal programs.
46. Specialized service facilities.

a. The costs of services provided by highly complex or specialized facilities operated by the non-profit
organization, such as computers, wind tunnels, and reactors are allowable, provided the charges for the
services meet the conditions of either 46 b. or c. and, in addition, take into account any items of income
or Federal financing that qualify as applicable credits under Attachment A, subparagraph A.5. of this
Circular.
b. The costs of such services, when material, must be charged directly to applicable awards based on actual
usage of the services on the basis of a schedule of rates or established methodology that (i) does not
discriminate against federally supported activities of the non-profit organization, including usage by the
non-profit organization for internal purposes, and (ii) is designed to recover only the aggregate costs of
the services. The costs of each service shall consist normally of both its direct costs and its allocable
share of all indirect costs. Rates shall be adjusted at least biennially, and shall take into consideration
62
over/under applied costs of the previous period(s).
c. Where the costs incurred for a service are not material, they may be allocated as indirect costs.
d. Under some extraordinary circumstances, where it is in the best interest of the Federal Government
and the institution to establish alternative costing arrangements, such arrangements may be worked out
with the cognizant Federal agency.
47. Taxes.
a. In general, taxes which the organization is required to pay and which are paid or accrued in accordance
with GAAP, and payments made to local governments in lieu of taxes which are commensurate with the
local government services received are allowable, except for (i) taxes from which exemptions are
available to the organization directly or which are available to the organization based on an exemption
afforded the Federal Government and in the latter case when the awarding agency makes available the
necessary exemption certificates, (ii) special assessments on land which represent capital improvements,
and (iii) Federal income taxes.
b. Any refund of taxes, and any payment to the organization of interest thereon, which were allowed as
award costs, will be credited either as a cost reduction or cash refund, as appropriate, to the Federal
Government.
48. Termination costs applicable to sponsored agreements.
Termination of awards generally gives rise to the incurrence of costs, or the need for special treatment of
costs, which would not have arisen had the Federal award not been terminated. Cost principles covering
these items are set forth below. They are to be used in conjunction with the other provisions of this Circular
in termination situations.
a. The cost of items reasonably usable on the non-profit organization's other work shall not be allowable
unless the non-profit organization submits evidence that it would not retain such items at cost without
sustaining a loss. In deciding whether such items are reasonably usable on other work of the non-profit
organization, the awarding agency should consider the non-profit organization's plans and orders for
current and scheduled activity.
Contemporaneous purchases of common items by the non-profit organization shall be regarded as

evidence that such items are reasonably usable on the non-profit organization's other work. Any
acceptance of common items as allocable to the terminated portion of the Federal award shall be limited
to the extent that the quantities of such items on hand, in transit, and on order are in excess of the
reasonable quantitative requirements of other work.
b. If in a particular case, despite all reasonable efforts by the non-profit organization, certain costs cannot
be discontinued immediately after the effective date of termination, such costs are generally allowable
within the limitations set forth in this Circular, except that any such costs continuing after termination
due to the negligent or willful failure of the non-profit organization to discontinue such costs shall be
unallowable.
c. Loss of useful value of special tooling, machinery, and is generally allowable if:
(1) Such special tooling, special machinery, or equipment is not reasonably capable of use in the other
work of the non-profit organization,
63
(2) The interest of the Federal Government is protected by transfer of title or by other means deemed
appropriate by the awarding agency, and
(3) The loss of useful value for any one terminated Federal award is limited to that portion of the
acquisition cost which bears the same ratio to the total acquisition cost as the terminated portion of the
Federal award bears to the entire terminated Federal award and other Federal awards for which the
special tooling, special machinery, or equipment was acquired.
d. Rental costs under unexpired leases are generally allowable where clearly shown to have been
reasonably necessary for the performance of the terminated Federal award less the residual value of
such leases, if:
(1) the amount of such rental claimed does not exceed the reasonable use value of the property leased
for the period of the Federal award and such further period as may be reasonable, and
(2) the non-profit organization makes all reasonable efforts to terminate, assign, settle, or otherwise
reduce the cost of such lease. There also may be included the cost of alterations of such leased
property, provided such alterations were necessary for the performance of the Federal award, and of
reasonable restoration required by the provisions of the lease.
e. Settlement expenses including the following are generally allowable:
(1) Accounting, legal, clerical, and similar costs reasonably necessary for:
(a) The preparation and presentation to the awarding agency of settlement claims and supporting data
with respect to the terminated portion of the Federal award, unless the termination is for default (see
Subpart __.61 of Circular A-110); and
(b) The termination and settlement of sub awards.
(2) Reasonable costs for the storage, transportation, protection, and disposition of property provided by
the Federal Government or acquired or produced for the Federal award, except when grantees or
contractors are reimbursed for disposals at a predetermined amount in accordance with Subparts __.32
through ___.37 of Circular A-110.
(3) Indirect costs related to salaries and wages incurred as settlement expenses in subparagraphs (1) and
(2). Normally, such indirect costs shall be limited to fringe benefits, occupancy cost, and immediate
supervision.
f. Claims under sub awards, including the allocable portion of claims which are common to the Federal
award, and to other work of the non-profit organization are generally allowable.
An appropriate share of the non-profit organization's indirect expense may be allocated to the amount
of settlements with subcontractors and/or sub grantees, provided that the amount allocated is
otherwise consistent with the basic guidelines contained in Attachment A. The indirect expense so
allocated shall exclude the same and similar costs claimed directly or indirectly as settlement expenses.
49. Training costs.

a. Costs of preparation and maintenance of a program of instruction including but not limited to on-the-
job, classroom, and apprenticeship training, designed to increase the vocational effectiveness of
employees, including training materials, textbooks, salaries or wages of trainees (excluding overtime
compensation which might arise therefrom), and (i) salaries of the director of training and staff when the
64
training program is conducted by the organization; or (ii) tuition and fees when the training is in an
institution not operated by the organization, are allowable.
b. Costs of part-time education, at an undergraduate or post-graduate college level, including that provided
at the organization's own facilities, are allowable only when the course or degree pursued is relative to
the field in which the employee is now working or may reasonably be expected to work, and are limited
to:
(1) Training materials.
(2) Textbooks.
(3) Fees charges by the educational institution.
(4) Tuition charged by the educational institution or, in lieu of tuition, instructors' salaries and the
related share of indirect costs of the educational institution to the extent that the sum thereof is not in
excess of the tuition which would have been paid to the participating educational institution.
(5) Salaries and related costs of instructors who are employees of the organization.
(6) Straight-time compensation of each employee for time spent attending classes during working hours
not in excess of 156 hours per year and only to the extent that circumstances do not permit the
operation of classes or attendance at classes after regular working hours; otherwise, such compensation
is unallowable.
c. Costs of tuition, fees, training materials, and textbooks (but not subsistence, salary, or any other
emoluments) in connection with full-time education, including that provided at the organization's own
facilities, at a post-graduate (but not undergraduate) college level, are allowable only when the course or
degree pursued is related to the field in which the employee is now working or may reasonably be
expected to work, and only where the costs receive the prior approval of the awarding agency. Such
costs are limited to the costs attributable to a total period not to exceed one school year for each
employee so trained. In unusual cases the period may be extended.
d. Costs of attendance of up to 16 weeks per employee per year at specialized programs specifically
designed to enhance the effectiveness of executives or managers or to prepare employees for such
positions are allowable. Such costs include enrollment fees, training materials, textbooks and related
charges, employees' salaries, subsistence, and travel. Costs allowable under this paragraph do not
include those for courses that are part of a degree-oriented curriculum, which are allowable only to the
extent set forth in subparagraphs b and c.
e. Maintenance expense, and normal depreciation or fair rental, on facilities owned or leased by the
organization for training purposes are allowable to the extent set forth in paragraphs 11, 27, and 50.
f. Contributions or donations to educational or training institutions, including the donation of facilities or

other properties, and scholarships or fellowships, are unallowable.
g. Training and education costs in excess of those otherwise allowable under subparagraphs b and c may
be allowed with prior approval of the awarding agency. To be considered for approval, the organization
must demonstrate that such costs are consistently incurred pursuant to an established training and
education program, and that the course or degree pursued is relative to the field in which the employee
is now working or may reasonably be expected to work.
65
50. Transportation costs. Transportation costs include freight, express, cartage, and postage charges
relating either to goods purchased, in process, or delivered. These costs are allowable. When such costs can
readily be identified with the items involved, they may be directly charged as transportation costs or added to
the cost of such items (see paragraph 28). Where identification with the materials received cannot readily be
made, transportation costs may be charged to the appropriate indirect cost accounts if the organization
follows a consistent, equitable procedure in this respect.
51. Travel costs.

a. General. Travel costs are the expenses for transportation, lodging, subsistence, and related items
incurred by employees who are in travel status on official business of the non-profit organization. Such
costs may be charged on an actual cost basis, on a per diem or mileage basis in lieu of actual costs
incurred, or on a combination of the two, provided the method used is applied to an entire trip and not
to selected days of the trip, and results in charges consistent with those normally allowed in like
circumstances in the non-profit organization’s non-federally sponsored activities.
b. Lodging and subsistence. Costs incurred by employees and officers for travel, including costs of lodging,
other subsistence, and incidental expenses, shall be considered reasonable and allowable only to the
extent such costs do not exceed charges normally allowed by the non-profit organization in its regular
operations as the result of the non-profit organization’s written travel policy. In the absence of an
acceptable, written non-profit organization policy regarding travel costs, the rates and amounts
established under subchapter I of Chapter 57, Title 5, United States Code ("Travel and Subsistence
Expenses; Mileage Allowances"), or by the Administrator of General Services, or by the President (or his
or her designee) pursuant to any provisions of such subchapter shall apply to travel under Federal
awards (48 CFR 31.205-46(a)).
c. Commercial air travel.
(1) Airfare costs in excess of the customary standard commercial airfare (coach or equivalent), Federal
Government contract airfare (where authorized and available), or the lowest commercial discount
airfare are unallowable except when such accommodations would: (a) require circuitous routing; (b)
require travel during unreasonable hours; (c) excessively prolong travel; (d) result in additional costs
that would offset the transportation savings; or (e) offer accommodations not reasonably adequate for
the traveler’s medical needs. The non-profit organization must justify and document these conditions on
a case-by-case basis in order for the use of first-class airfare to be allowable in such cases.
(2) Unless a pattern of avoidance is detected, the Federal Government will generally not question a non-
profit organization's determinations that customary standard airfare or other discount airfare is
unavailable for specific trips if the non-profit organization can demonstrate either of the following: (a)
that such airfare was not available in the specific case; or (b) that it is the non-profit organization’s
overall practice to make routine use of such airfare.
d. Air travel by other than commercial carrier. Costs of travel by non-profit organization-owned, -leased,
or -chartered aircraft include the cost of lease, charter, operation (including personnel costs),
maintenance, depreciation, insurance, and other related costs. The portion of such costs that exceeds
the cost of allowable commercial air travel, as provided for in subparagraph] c., is unallowable.
e. Foreign travel. Direct charges for foreign travel costs are allowable only when the travel has received
prior approval of the awarding agency. Each separate foreign trip must receive such approval. For
purposes of this provision, "foreign travel" includes any travel outside Canada, Mexico, the United
66
States, and any United States territories and possessions. However, the term "foreign travel" for a non-
profit organization located in a foreign country means travel outside that country.
52. Trustees. Travel and subsistence costs of trustees (or directors) are allowable. The costs are subject to
restrictions regarding lodging, subsistence and air travel costs provided in paragraph 51.
67
OFT MANUAL: FM Budgeting and Planning SECTION – 3
What is Budgeting?
A budget is a financial document used to project future income and expenses. It is an itemized summary
of estimated or intended expenditures for a given period along with proposals for financing them. A
budget is a forecast of revenue, expenditure and profit. A budget shows you exactly where your money
goes and provides a spending plan that lets you save for the things that are important to you
Purpose of Budgeting:
The budget is a tool providing targets and direction. Budgets provide control over the immediate
environment, help to master the financial aspects of the job and department, and solve problems before
they occur. Budgets focus on the importance of evaluating alternative actions before decisions are
actually implemented. There are two (often overlapping) reasons for producing a budget. One is to
persuade potential investors that your company is a good bet. The other one is to plan your business
finances.
Budgeting For NGO’s:
Budget” is a term that NGOs often come across when they need to plan and implement a project
activity. Besides, we also come across this term again and again when we are in the process of developing
a proposal.
Any donor funding for NGOs is limited and a proper and planned budget is required to convince the
donor to access this funding. Donor agencies also have their limitations and they distribute their financial
resources evenly amongst NGOs based not only on their project plans but also according to the budget
they present.
Budget, in simple terms, means a document where you specify how much money you are going to spend
(in other words, expenditure), especially if your organization has received grants. In some cases, as in
businesses, budgets can also include the money that the organization is going to generate or “income.”
The latter is important for all NGOs now because managing any organization, including an NGO does
not mean just spending – we also need to look at how costs can be covered and money can be saved for
other activities.
Budget development and oversight is a fundamental part of management's responsibility to oversee and
improve operations. Corporate and volunteer organizations alike utilize budget practices to manage
financial resources on an annual, quarterly, and even project-by-project basis. Many NGOs tend to plan
out a budget only when they need to develop a project proposal for a donor agency
Planning for budgeting
Planning is one of the most important project management and time management techniques. Planning is
preparing a sequence of action steps to achieve some specific goal. If you do it e effectively, you can
reduce much the necessary time and effort of achieving the goal.
A plan is like a map. When following a plan, you can always see how much you have progressed towards
your project goal and how far you are from your destination. Knowing where you are is essential for
making good decisions on where to go or what to do next.
Planning is beneficial because it allows the project team to:
68
 Take stock of the current position

 Identify precisely what is to be achieved
 Detail the who, what, when, where, why and how of achieving the target.
 Assess the impact of the plan on your organization and the people within it, and on the outside
world.
 Evaluate whether the effort, costs and implications of achieving the plan are worth the achievement.
 Consider the control mechanisms (for example reporting, quality or cost control) that are needed to
achieve your plan and keep it on course.
Myths about Budgets clarified:
“Budgets cannot be Budgets can be modified to some extent. You can diversify your resources and cut
changed” your costs. Of course, take prior permission from your donor agency for this.
“Budgets can be Often in our effort to meet proposal deadlines, we develop budgets overnight.
developed overnight” This ends up in poor planning and even rejection of proposals. Always take time to
build your budget – your NGO should live with a budget always!
“Budgets do not have Budgets should be developed on a certain base. They cannot be developed without
a basis” any basis. In most cases, the basis should be the previous year’s income and
expenditure. If applying for a project, look out for the expenses of the project’s
previous year. Donor funding limitation to be also considered
“Budget can be Budget work is a joint exercise. It is a team work. Involving the entire team is
developed by a single
69
person” important to produce an effective budget.
“Budgets have same All budgets do not have same formats. Different budgets are developed for
formats” different purposes. If you are writing a proposal, it is a different budget format and
if you managing an organization, you will have a different budget format. Similarly,
different donor agencies have different budget formats
Purpose of budgeting and budgetary control procedures
The purpose of budgeting and budgetary control procedures is to:
 Prepare annual and/or operational budgets

 To record daily expenditure by the grant recipient budget code
 To record cumulative expenditure to date by budget code
 To compare and monitor cumulative expenditure by budget code to the original (or revised) budget
allocations from donors
 These procedures should satisfy the requirements of the donors funding the grant recipient.
 Information from the budget book can be used in the budget-monitoring sheet for reporting and also for
assisting in controlling expenditure.
Ideally, the budget book should be maintained on a computer spreadsheet. This makes it easy to update and
amend. However, the budget book may be maintained and updated manually. Each budget line should be on a
separate page.
Procedure for withdrawing amount for budgeted program
 Check whether activity/expenditure is approved by the line manager

 Sufficient fund approvals exist
 The Finance Department need to check for the availability of budget in the respective budget heads for
conducting the activity/expenditure
Budget and expenditure procedures
Principal activities that should be performed:
 Prepare annual work programme and budget.

 Prepare operational budgets.
 Record the original (or revised) budget for the financial year.
 Post daily expenditure to the budget book, record cumulative expenditure and monitor remaining
budget.
 Obtain donor approval in advance for revisions of budgets
70
Preparing the Budget
When preparing an operating budget, nonprofits embark on a thorough and oftentimes painstaking
development process. Although nonprofits are expected to create a financial plan that dually represents their
service philosophy and the agency's commitment to fiscal accountability. As with most businesses, the mission
statement drives operations; therefore, the final budget must fully support its mission and vision statements.
Comprehensive budget projections include income, expense, and profit (or loss) estimations. Nonprofit
organizations, as do profitable organizations, include an income section to represent any revenue projected
for receipt in the upcoming fiscal year. However, amounts included here primarily include any approved grant
dollars, community donations, or membership fees.
Expenses, conversely, are amounts projected as an outflow of money paid to another person or entity for
goods provided or services rendered. Therefore, a nonprofit organization sheltering abused domestic animals
might develop a budget that includes revenue received from funders, membership donations as well as any
anticipated operational expenses such as veterinarian fees, shelter supplies, and food. (An example of a
budget template used by a non-profit can be accessed here).
Frequently, a nonprofit organization offering several programs and services has indirect costs that apply to
more than one program. These indirect or administrative costs may include professional services, rent,
liability insurance, or staff time. Nonprofits often calculate these costs by calculating the percentage of the
cost that applies to each program and then uniformly applying the amount based on grant stipulations.
Steps in making a budget
1. Gathering financial data. This step involves the development of reasonable assumptions regarding the
expected outflows and inflows in the years in question. This includes bank statements, investment
accounts, recent utility bills and any information regarding a source of income or expense. The key for
this process is to create a monthly average based on historical data or assumptions based on a
reasonable source.
2. Recording of all sources of income per month and for the years. This step also required a lot of financial
data analysis to back up figures given in the budget as they have to be realistic and prudent.
3. Create a list of monthly expenses. Write down a list of all the expected expenses incurring over the
course of a month. This might include office rent, car payments, utilities, entertainment etc.
4. Break expenses into two categories: fixed and variable. Fixed expenses are those that stay relatively the
same each month and are necessary for normal operation of business. They included expenses such as
internet service, phone bills, trash pickup, credit card payments and so on. These expenses for the most
part are essential yet not likely to change in the budget. Variable expenses are the type that will change
from month to month and include items such as gasoline, entertainment etc. This category will be
important when making adjustments.
5. Total your monthly income and monthly expenses. If the end result shows more income than expenses
then it’s a good start although it is normal for a business to face some losses in the start. If the expenses
are higher than the income or funding available that means some changes will have to be made.
6. Make adjustments to expenses. If all the expenses are accurately identified and they still outnumber the
inflows then readjustments will have to be made in order to justify the budget to the donors/ investors.
71
7. Review the budget monthly. It is important to review the budget on a regular basis to make sure that all
the activities preformed are within the approved budget.
What does USAID say about Budget?
Cost proposals must be submitted as a separate section, which is not subject to the page limitation of the
program proposal. Cost proposals must be in USD only. USAID/OFDA will review the cost proposal in
conjunction with the program proposal for purposes of cost realism. Cost realism is the relationship between
the level of resources and their relative cost to the achievement of the performance targets.
In addition to cost realism, USAID/OFDA will apply the following criteria to the cost proposal:
• Are costs allowable
• Are costs allocable
• Are costs reasonable and effective
• Levels of cost sharing or in-kind contributions
• Contributions of other donors
• Program income
• Sufficiency of justifications for any procurement of restricted goods
For further information on costs considered allowable, allocable, and reasonable, please refer to 22 CFR 230,
Cost Principles for Non-Profit Organizations, which was formerly OMB Circular A-122
http://www.whitehouse.gov/omb/circulars/index.html
For further information on program income, refer to 22 CFR 22624, Administration of Assistance Awards to U.S.
Non-governmental Organization http://www.access.gpo.gov/nara/cfr/waisidx_06/22cfr226_06.html
Detailed/Itemized Budget
The detailed and itemized budget should list and account for individual line items within each object class
category for each sector objective. Object class categories are logical groupings of costs, such as staff salaries,
fringe benefits, travel, capital equipment, supplies, and indirect costs.
These sample budgets are strictly illustrative; applicants should use their own dollar figures, rates, and cost
allocation methodologies.
USAID/OFDA prefers budgets be provided in Excel. Shared costs, meaning costs that are not precisely
allocable to a specific objective, may no longer be budgeted as a separate category, as this tends to result in
under-reporting on sector-based objectives. Instead, such costs should be allocated to each objective based
on estimated utilization.
For example, rather than listing office rent as lump sum, applicants should estimate the use of office space
toward implementation in each sector, and assign costs to each objective accordingly.
Following the award, pursuant to 22 CFR 226.25 (c), U.S. NGOs may shift funds between objectives without
approval, although notification of changes is mandatory. For non-U.S. NGOs, the standard provision entitled
“Revision of Award Budget” requires the agreement officer’s approval to shift funds between objectives.
However, since August 2005, all new awards with non-U.S. NGOs permit shifting of funds between objectives
without the agreement officer’s approval, subject to concurrence of the OFDA/W Cognizant Technical
Officer (CTO). For any recipient, USAID/OFDA has the discretion to impose a 10 percent limit on budget
transfers between objectives; however, this restriction is rarely invoked.
72
Budget Narrative
The budget narrative justifies proposed expenses and explains how costs were estimated. Applicants should
provide their rationale for cost development, such as the methodology and assumptions used to determine
individual costs, i.e., engineering cost estimates, actual current costs incurred, costs obtained through tenders
or bids, catalog prices, or published salary tables. A thorough budget narrative will expedite the cost proposal
review and prevent NGO field staff from having to revisit the proposal and provide justifications following
proposal submission.
For ease of review, budget narratives should follow the order of line items in the detailed budget (top to bottom),
rather than by objective (left to right). These narratives are strictly illustrative, and are based on the sample
detailed budgets. Applicants should use their own rationale based on their proposed program design,
associated inputs, and detailed budget.
73
OFT MANUAL: FM Accounting and Reporting Systems SECTION – 4
Why NGOs maintain accounting system?
Credibility
The robust accounting system has paramount significance in maintaining the fiduciary relationship among key
stakeholders of NGO named as governing body, funding agencies, regulators and beneficiaries.
Information
Accounting system provides information;
 Stewardship of entrusted financial resources

 Spending rate / program / project implementation rates
 Financial position and health of NGO
Legal Requirement
Under applicable NGO registration statutes named as Societies Registration Act 1860, Trust Act 1882,
Voluntary Social Welfare Agencies (Registration & Control) Ordinance 1961and Companies Ordinance 1984
require maintaining transparent accounting records.
Planning and control
The accounting information enables the decision makers to evaluate past results and assess spending trends
during the previous planning periods.
The historical accounting data helps the financial planners to drive reliable cost estimates for budgeting
purposes.
The updated and accurate accounting information also enables the governing body to exercise due control
over the utilization of financial resources.
74
Accounting System in the Context of NGO Sector
NGO
Funding from donor agencies Organizational, Program and

and internal sources of funds Project activities
Financial Transactions
Accounting System
Financial Accountability
Statement
Donor agencies Governing Body Regulators Beneficiaries
75
Overview of Accounting System
Definition of
Accounting System
Gather Recording
Classification Summarization Analyzing
General Ledger /
Supporting Trial balance Financial
Nominal Ledger
documentation statements
Cash vouchers Methods of

Bank vouchers
Journal vouchers Accounting
Cash basis of
Single Entry System Double Entry Accounting
System
Basis of accounting Accrual basis of

Accounting
76
Definition of accounting system
“It is the process to gather, record, classify, summarize and analyze the financial transactions and events”
3.4.1 Qualities of accounting information
Relevant: To fulfill the information needs of governing body, donor agencies, regulators, beneficiaries,
general public and employees
Reliable: Reliable financial information should be incorporated in the accounting system
Complete: The complete records of program / project activities should be maintained for accountability and
integrity purposes
Accurate: Accurate and update data should be entered in the accounting system
Objective: Accounting system procedures should prevent the element of management bias
Comparable: Accounting system should enable the responsible manager to perform analytical procedures
on the project implementation cost
Cost effective: Accounting information system should meet the cost and benefit criteria
User-friendly: Accounting system should be designed as per the knowledge and experience of finance and
program team
Timely: Accounting information system should fulfill the submission deadlines of donor agencies and
regulators
USG and Agency regulations such as 22 CFR 226.21 contains guidelines and
instructions to maintain accurate, complete, updated accounting information
for accountability purposes
77
Supporting documentation
Every NGO should keep files of the following original documents to support every transaction taking place:
 Voucher for money received

 Voucher for money paid out
 Invoices – certified and stamped as paid Bank paying-in vouchers stamped and dated when money is
deposited bank statements
 Journal vouchers – for one-off adjustments and non-cash transactions.
With these documents on file it will enable the accountants to record the financial transactions in
appropriate manner.
3.6.1 Vouchers
78
Types of vouchers
Methods of Accounting
Methods of Accounting
Financial transactions are recorded in Every transaction has a double or dual effect on the
the petty cash and bank books operations of NGO. The second effect is equal and
opposite of the first
Rule: Every debit has a matching credit such that

they sum to zero
The donor agencies encourage NGOs to adopt double entry accounting system for record organizational,
program and project transactions
79
Definitions of elements of accounting information
Assets
An asset is a resource controlled by the NGO as a result of past events and from which future economic
benefits are expected to flow to the organization.
Liabilities
A liability is a present obligation of the NGO arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits.
Accumulated Funds
Accumulated Funds are the residual interest in the assets of the entity after deducting all its liabilities.
Income
Income is increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in accumulated funds
Expenses
Expenses are decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrence’s of liabilities that result in decreases in accumulated funds.
Basis of Accounting
There are two main bases for keeping accounts:
 Cash accounting
 Accruals accounting
The two methods differ in a number of ways but the crucial difference is in how they deal with the timing of
the two types of financial transaction:
 Cash transactions which have no time delay since the trading and exchange of monies takes place
simultaneously.
 Credit transactions which involve a time lag between the contract and payment of money for the
goods or services.
Cash Accounting
This is the simplest way to keep accounting records and does not require advanced
Bookkeeping skills to maintain. The main features are:
80
 Payment transactions are recorded in a Bank (or Cash) Book as and when they are made and
incoming transactions as and when received.
 The system takes no account of time lags and any bills which might be outstanding.
 The system does not automatically maintain a record of any money owed by (liabilities) or to (assets)
the organization.
 The system cannot record non-cash transactions such as a donation in kind or depreciation.
 When summarized, the records produce a Receipts and Payments Account for a given period. This
simply shows the movement of cash in and out of the organization and the cash balances at any given
time.
Accruals Accounting
This involves ‘double entry’ bookkeeping which refers to the dual aspects of recording financial transactions
to recognize that there are always two parties involved: the giver and The receiver. The dual aspects are
referred to as debits and credits. This system is more advanced and requires accountancy skills to maintain.
Expenses are recorded in a General Ledger as they are incurred, rather than when
The bill is actually paid; and when income is truly earned (i.e. we are 100% certain it will be paid) rather than
when received. By recognizing financial obligations when they occur, not when they are paid or received, this
overcomes the problem of time lags, giving a truer picture of the financial position. The system can deal with
all types of transactions and adjustments. The system automatically builds in up-to-date information on assets
and liabilities.
These records provide an Income and Expenditure Account summarizing all income and expenditure
committed during a given period; and a Balance Sheet which demonstrates, amongst other things, moneys
owed to and by the organization on the last day of the period.
Comparison of Cash Accounting and Accrual Accounting
Cash Accounting Accrual Accounting
Accounting system Single entry Double entry

Transaction types Cash Cash and credit
Terminology Receipts and Payments Income and Expenditure
Main Book of Account Petty and cash book General Ledger
Skill level Basic Advanced
Non-cash transactions No Yes
Assets and liabilities No Yes
Reports Receipts and Payment Report Income and Expenditure Report
81
General Ledger
This is a central record which pulls together basic bookkeeping information from the main working books of
account (Bank Book, Petty Cash Book, Grant and Purchase Ledgers). It is like a series of ‘pigeonholes’ used
to sort basic financial information and is especially useful when an organization has several projects and
different donors requiring different reports.
The General (or Nominal) Ledger has one page for each category of income, expenditure, assets and
liabilities and information is ‘posted’ from the other accounting books into each pigeonhole.
It plays a central role in the double-entry bookkeeping system and is the basis for the Trial Balance, the
starting point for preparation of financial statements.
Other Ledgers
Other elements in a full-bookkeeping system include:
 Grants ledger and sales day book

 Purchase ledger and purchase day book
 Stock ledger
 Journal
These, together with the Bank Book and Petty Cash Book are the day-to-day working accounts books. It is
quite possible to set up a General Ledger without these additional ledgers; the choice will depend on the
activities of your organization. The Journal is used to record unusual, one-off transactions which cannot be
recorded easily in other books of accounts. These will include non-cash transactions (such as depreciation
and donations-in-kind), adjustments and corrections.
A journal entry follows the rules of double entry and will always include entries to at least two accounts. For
example, a donation-in-kind in the form of rent-free office space would be recorded as income under
‘Donations’ and expenditure under ‘Office Rent’.
Example to under standard accounting system

In December 2012, the ABC NGO succeeded to obtain funds from USAID under the terms and conditions
of grant agreement and approved budget for one year. The ABC management has been prepared following
chart of accounts as per the approved project budget lines
Chart of Accounts
Budget line Account title Account code Type of

account
Focus group discussions Focus group discussions 1001 Expense
Seminars Seminars 1002 Expense
Follow up workshops Follow up workshops 1003 Expense
Salaries and fringe benefits Salaries and fringe benefits 1004 Expense
Audit fee Audit fee 1005 Expense
Consultancy fee Consultancy fee 1006 Expense
Utilities Utilities 1007 Expense
Office rent Office supplies 1008 Expense
82
Car rentals Car rentals 1009 Expense

Grant income 2000 Income
Restricted funds 3000 Liability
Payable to suppliers 3001 Liability
Bank account 4001 Asset
Cash in hand account 4002 Asset
Prepayments 4003 Asset
Accounting policies
The ABC NGO management has been recognizing the financial transactions of project as per the generally
accepted accounting principles-GAAP
Details of occurrence of financial transactions in the first month of project implementation
The following USAID transactions were occurred in the month of January 2013
SR Date of Description Type of Amount
no Transaction transaction
Rupees
1 07-01-2013 Funds received from USAID Bank 3,100,000
2 11-01-2013 Cost incurred for Focus group discussion Bank 425,000
3 17-01-2013 Cost incurred for One day seminar Credit 1,200,000
4 20-01-2013 Cash drawn from bank for petty expenses Bank 30,000
5 22-01-2013 Utility bills Cash 14,500
6 25-01-2013 Office supplies Cash 8,000
7 31-01-2013 Paid office rent for 6 months @ Rs 50,000 Bank 300,000
from 1ST February to 31st July 2013
8 31-01-2013 Accrual for monthly vehicle rentals of Jan 2013 Credit 50,000
9 31-01-2013 Consultancy fee paid for report writing Bank 250,000
10 31-01-2013 Grant income recognized on the basis of Non-cash 1,947,500
project implementation cost transaction
Section A: Recording of financial transactions

Transaction # 01: Funds received from USAID in the designated bank account
ABC NGO
Bank Receipt Voucher-BRV

Voucher date: 07-01-2013 Voucher no: BRV 01/01/13
Account code Description Debit Credit
Rupees Rupees
4001 Bank account 3,100,000
3000 Restricted funds account 3,100,000
Funds received from USAID
Prepared by Checked by Approved by

Signatures Signatures Signatures
83
Transaction # 02: Program activity cost paid through bank channels
ABC NGO
Transaction # 3: Purchase of goods and services on credit
Bank Payment Voucher-BPV
Voucher date: 11-01-2013 Voucher
ABC NGOno: BPV 01/01/13
Journal Voucher-JV Rupees Rupees
1001
Voucher Focus group discussion meeting
date: 17-01-2013 account
Voucher no: JV 01/01/13 425,000
4001
Account Bank Account
code Description Debit 425,000
Credit
Rupees Rupees
1002 Funds
One dayreceived
seminar from USAID 1,200,000
3001 Payable to suppliers 1,200,000
Signatures
Cost of program activity notSignatures
yet paid to supplier Signatures

Transaction # 4: Cash drawn from bank for petty expenses
ABC NGO
Bank Payment Voucher

Voucher date: 20-01-2013 Voucher no: BPV 02/01/13
Rupees Rupees
4002 Cash in hand account 30,000
4001 Bank account 30,000
Cash withdrawn from bank for petty expenses

Transaction # 5: Payment of utility bills
ABC NGO
Cash Payment Voucher-CPV

Voucher date:22-01-2013 Voucher no: CPV 01/01-13
84
Rupees Rupees
1007 Utilities account 14,500
Transaction # 6: Office supplies purchased
ABC NGO
Cash Payment Voucher-CPV

Voucher date: 25-01-2013 Voucher no: CPV 02/01-13
Rupees Rupees
1008 Office supplies account 8,000

Transaction # 7: Paid office rent for 6 months @ Rs 50,000 per month
ABC NGO

Voucher date:31-01-2013 Voucher no: BPV 03-01-13
Rupees Rupees
4003 Prepayments account 300,000

Transaction # 8: Accruals for monthly vehicle rentals
ABC NGO
Journal Voucher-JV
Voucher date: 31-01-2013 Voucher no: JV 02/01-13
Rupees Rupees
1009 Vehicle rentals account 50,000
3001 Payable to suppliers 50,000
Prepared by Checked by85 Approved by

Transaction # 9: Consultancy fee paid for report writing
ABC NGO

Voucher date:31-01-2013 Voucher no: BPV 04-01-13
Rupees Rupees
1006 Consultancy fee account 250,000

Transaction # 10: Recognition of grant income on the basis of project implementation cost
ABC NGO
Journal Voucher-JV
Voucher date: 31-01-2013 Voucher no: JV 03/01-13
Account Description Debit Credit
code
Rupees Rupees
3000 Restricted funds account 1,947,500
2000 Grant income account 1,947,500
Details of project implementation cost in the month of January 2013
Focus group discussion: Rs 425,000

Seminar cost : Rs 1,200,000
Utility bills: Rs 14,500
Office expenses: Rs 8,000
Vehicle rentals: Rs 50,000
Consultancy fee: Rs 250,000

86
Section B: Posting of transactions in Ledgers

Ledger of Restricted Funds
ABC NGO
Account title: Restricted funds

Account code: 3000
Date Voucher no Description Debit Credit Balance
Rupees Rupees Rupees
7-01-13 BRV 01/01-13 Fund received 3,100,000 3,100,000
31-01-13 JV 03/01-13 Grant recognition 1,947,500 1,152,500
Ledger of Focus group discussion meeting
ABC NGO
Account title: Grant income

Account code: 2000
31-01-13 JV 03/01-13 Grant income recognized 1,947,500 1,947,500
Ledger of Cash at bank
ABC NGO
Account title: Bank account

Account code: 4001
Opening balance -
07-01-13 BRV 01/01-03 Funds received 3,100,000 3,100,000
11-01-13 BPV 01/01-13 Program cost paid 425,000 2,675,000
20-01-13 BPV 02/01-13 Cash withdrawn 30,000 2,645,000
31-01-13 BPV 03/01-13 Prepaid office rent 300,000 2,345,000
31-01-13 BPV 04/01-13 Consultancy fee paid 250,000 2,095,000
Ledger of Focus group discussion meeting
ABC NGO
Account title: Focus group discussion meeting

Account code: 1001
11-01-13 BPV 01/01-13 Cost of program activity 425,000 425,000
87
Ledger of Seminar
ABC NGO
Account title: Seminar account

Account code: 1002
17-01-13 JV 01/01-13 Program activity on credit 1,200,000 1,200,000
Ledger of payable to suppliers
ABC NGO
Account title: Payable to supplier

Account code: 3001
17-01-13 JV 01/01-13 Program activity on credit 1,200,000 1,200,000
31-01-13 JV 02/01-13 Accruals 50,000 1,250,000
Ledger of Cash in hand
ABC NGO
Account title: Cash in hand
Account code: 4002
20-01-13 BPV 02/01-13 Cash drawn from bank 30,000 30,000
22-01-13 CPV 01/01-13 Utility bills paid 14,500 15,500
25-01-13 CPV 02/01-13 Office supplies paid 8,000 7,500
Ledger of Utilities
ABC NGO
Account title: Utilities
Account code: 1007
22-01-13 CPV 01/01-13 Utility bills paid 88 14,500 14,500
Ledger of Office supplies
ABC NGO
Account title: Office supplies
Account code: 1008
25-01-13 CPV 02/01-13 Office supplies paid 8,000 8,000
Ledger of Prepayments
ABC NGO
Account title: Prepayments

Account code: 4003
Ledger
Date of Vehicle
Voucherrentals
no Description Debit Credit Balance
31-01-13 BPV 03/01-13 ABC NGO
Prepaid office rent 300,000 300,000
Account title: Vehicle rentals
Account code: 1009
31-01-13 JV 02/01-13 Accruals for rentals 50,000 50,000
Ledger of consultancy fee
ABC NGO
Account title: Consultancy fee
Account code: 1006
31-01-13 BPV 04-01-13 250,000 250,000
89
Section C-Summarization of ledgers in the form of Trial Balance
ABC NGO
Trial balance for the period ended 31st January 2013
Account code Account title Type of Debit Credit

account
Rupees Rupees
3000 Restricted funds account Liability 1,152,500
2000 Grant income account Income 1,947,500
4001 Bank account Asset 2,095,000
1001 Focus group discussion meeting Expense 425,000
1002 Seminar account Expense 1,200,000
3001 Payable to supplier account Liability 1,250,000
4002 Cash in hand account Asset 7,500
1007 Utilities account Expense 14,500
1008 Office supplies account Expense 8,000
4003 Prepayments account Asset 300,000
1009 Vehicle rentals account Expense 50,000
1006 Consultancy fee account Expense 250,000
Totals 4,350,000 4,350,000
90
Section D-Financial statements
Income and expenditure statement

For the period ended 31st January 2013
Rupees
Income
Grant income 1,947,500
Expenditures
Focus group discussion meetings expense 425,000
Seminar expense 1,200,000
Utilities expense 14,500
Office supplies expense 8,000
Vehicle rentals expense 50,000
Consultancy fee expense 250,000
Total expenses 1,947,500
Surplus / (deficit) for the period ended -
Balance sheet
As on 31st January 2013
Rupees
Assets
Non-current assets
Fixed assets -
Long term investments -
-
Current assets
Prepaid office rent 300,000
Cash in hand 7,500
Cash at bank 2,095,000
Total assets 2,402,500
Funds and liabilities

Accumulated funds 1,152,500
Non-current liabilities -
Current liabilities
Payable to suppliers 1,250,000
Total funds and liabilities 91 2,402,500
01 Exercise
Transactions
SR no Description Amount
Rupees
1 Funds received from donor agency 500,000
2 Buy a car 55,000
3 Buy office supplies 45,000
4 Pay salaries 20,000
5 Pay office rent 40,000
6 Purchase office equipment on credit basis 58,000
7 Hire vehicle on credit basis 30,000
Required:
 Record transaction in double entry format

 Prepare Ledgers of financial transactions
 Prepare Trial Balance
Financial Reporting System

Overview
For Fixed Obligation Grants grantee has to submit an invoice stating the milestones achieved along
with its value for reimbursement.
Reporting is the primary way you demonstrate that you are meeting the expectations of your award
and complying with USAID requirements. Timely and accurate reporting contributes to building a
strong relationship with the donor and providing evidence of the impact of your program.
Often the day-to-day demands of running a program consume significant time and energy, and
writing reports feels like a distraction from attending to program needs. However, in addition to
being an important responsibility under the Cooperative Agreement, reporting can enhance the
daily operations of your programs by helping you examine the financial health, programmatic
strength, and performance of your organization and activities. It also gives you the opportunity to
bolster ties with your partners. It is advisable to develop a reporting culture within your program by
ensuring that all staff have the right tools and training to contribute appropriately. By viewing
reporting as a management tool and process that can improve your ability to serve your
beneficiaries and meet donor needs and expectations, you will come to experience its benefits.
92
Key Terms and Acronyms
• Allowable Cost—an incurred cost determined to be an acceptable charge.

• Audit—An independent review and examination of system records and activities.
• Burn Rate—The rate at which an organization spends its award funds on a periodic basis,
typically monthly.
• Finding—The answer to an audit objective that is supported by sufficient, competent, and
relevant evidence.
• Fiscal Year—Sometimes called a financial year or budget year, a period used for calculating
annual (“yearly”) financial statements in businesses and other organizations. It may or may not
correspond to the calendar year, that is, January 1 through December 31. The USG fiscal year
covers a 12-month period that begins October 1 and ends the following September 30.
• FMO—USAID’s Financial Management Office.
• Foreign Tax Report—The report that all USG recipients must fill out annually to report the
Value-Added Tax (VAT) that was paid to the host government. The reports are used to ensure that
U.S. foreign assistance is not being taxed.
• Management Decision—The evaluation of a recommendation by management and a decision
on an appropriate course of action.
• Pipeline—The amount of funds obligated but not yet spent, which is calculated by adding all funds
spent to date and subtracting that amount from the total obligation to date.
• QPR—Quarterly Performance Report.
Five Tips for Outstanding Reporting
1. Do not be afraid to tell the truth.

It is exciting and rewarding to report on your program’s successes, but sometimes your
reports will have some bad news, too. Do not try to hide the challenges you are facing. Your
Agreement Officer’s Technical Representative (AOTR) is on your side and wants to help,
but he or she can only do so if you provide an honest assessment. Program managers who
demonstrate they can overcome unforeseen challenges make positive impressions on
donors.
2. Develop a reporting calendar and timeline.

To ensure you have plenty of time to assemble good reports, list all of the requirements on
a calendar and plan ahead so you will not be rushed. Make sure all staff and sub recipients
who contribute to each report are aware of the timeline and due date.
3. Engage sub recipients early.

Most reports require prime partners to gather information from sub recipients. When
creating your reporting calendar, allow enough time for your sub recipients to give you
meaningful input. This not only leads to a better report, but it also builds sub recipients’
capacity by involving them in the self-evaluation aspects of reporting and holding them
accountable for data gathering and deadlines. Be sure to close the loop with
sub recipients by sending them copies of the reports you submit to USAID.
4. Tell a consistent story in all of your reports.
93
There is a negative disconnect if your performance reports describe a financially healthy

program, but your Federal Financial Reports show you are going through your funding more
quickly than expected. All of your reports should be linked together, so that when your
AOTR reviews your program documentation, he or she gets an accurate picture. Quantify all
of your conclusions with data, and show how your program is meeting
targets and staying on budget. This allows your AOTR to conclude that your program is
doing well.
5. Do not surprise your AOTR or AO.

Reports document various aspects of your program—they are not the primary means of
communicating with your funding agency. You should discuss major challenges with budget,
staff, partnerships, or
implementation strategies with your AOTR first, and document them later in your reports.
94
OFT MANUAL: FM Cash Management SECTION – 5
What is Cash Management?

Cash management is a broad term that covers a number of functions that help organizations to process receipts
and payments in an organized and efficient manner.
Overview of Cash Management in the Context of NGO Sector
NGO
Funding from donor Organizational and Organizational, Internal Sources

agencies Project Bank Accounts Program and of Cash flows
Project activities
Cash Transactions
Obligated funds Vs
Approved Budgets
Cash Management
Objectives of Cash Management
To ensure availability of To ensure utilization of To develop To identify cash surplus

sufficient cash for cash as per grant correlation of cash and deficit at
effective and efficient agreements approved management appropriate point of
implementation of project proposal and procedures with time
Program / Project budgets planning and
monitoring systems
95
Overview of cash Forecast and Program/Project Efficiency
Funding Agency
Project proposal Cash Resources Cash Forecast
NGO
Suppliers of services Suppliers of goods
Program / Project target areas
Beneficiaries of Program / Project
96
Overview of preparation process of cash flow forecast / cash Budget
Approved project proposal, budgets and donor agreements
Funding Grid
Obligated funds Vs Budgets
Program / Project implementation plan
Activity Budgets
Master Budget
Cash Forecast
97
Format of Cash Budget / Cash Flow Forecast
The cash budget is an essential element of cash management. The standard format of cash budget is
mentioned below.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Oct-Dec Jan-Mar Apr-Jun Jul-Sept
Rs Rs Rs Rs
Opening balance XXX XXX XXX XXX
Cash inflows
Grants XXX XXX XXX XXX
Interest income XXX XXX XXX XXX
Rental income XXX XXX XXX XXX
Total cash inflows XXX XXX XXX XXX
Cash outflows
Salaries (XXX) (XXX) (XXX) (XXX)
Fringe benefits (XXX) (XXX) (XXX) (XXX)
Program activities (XXX) (XXX) (XXX) (XXX)
Capital Expenditure (XXX) (XXX) (XXX) (XXX)
Other direct cost (XXX) (XXX) (XXX) (XXX)
Total cash outflows (XXX) (XXX) (XXX) (XXX)
Closing Balance XXX XXX XXX XXX
Under USAID regulation ADS 636, cash budget is imperative to obtain

Program funded advances from agency.
98
101Example
The Program & Financial Planning team of Star NGO has prepared annual budget for the year ended 30th
September 2013 and its extracts are mentioned below
Budget information
 Average monthly program activities cost Rs 2,500,000

 Monthly salary expense Rs 1,200,000
 NGO plans to purchase vehicle Rs 4,500,000 in the month of July 2013
 Six advance office rent Rs 600,000 will be paid to Land Lord on 1-10-2012 and 1-04-2013
 Monthly internet fee Rs 85,000
 Monthly fuel cost Rs 250,000
 Monthly security guard fee: Rs 32,000
 Monthly vehicle rental cost Rs 100,000
Liquidity and other information
 Planning period: 1-10-2012 to 30-09-2013

 Opening cash and bank balance as at 1-10-2012: Rs 8,000,000
 Donor will disburse funds Rs 10,000,000 on 31 Dec 2012, 31 March 2013, 30 June 2013 and 30 Sept
2013 during the planning period.
Required:
Prepare annual cash budget for the planning period ended 30th September 2013. The cash budget should be
divided into quarters of 90 days each.
99
Solution of Example 101
Star NGO
Cash Flow Forecast
Planning period: 1-10-2012 to 30-09-2013
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Oct-Dec Jan-Mar Apr-Jun Jul-Sept
Rs Rs Rs Rs
Opening balance 8,000,000 4,899,000 2,398,000 (703,000)
Cash inflows
Grants 10,000,000 10,000,000 10,000,000 10,000,000
Total cash inflows
Cash outflows
Program activities (7,500,000) (7,500,000) (7,500,000) (7,500,000)
Salaries (3,600,000) (3,600,000) (3,600,000) (3,600,000)
Capital expenditures (4,500,000)
Office Rent (600,000) (600,000)
Internet fee (255,000) (255,000) (255,000) (255,000)
Fuel cost (750,000) (750,000) (750,000) (750,000)
Security fee (96,000) (96,000) (96,000) (96,000)
Vehicle rental cost (300,000) (300,000) (300,000) (300,000)
Total cash outflows (13,101,000) (12,501,000) (13,101,000) (17,001,000)
Closing Balance 4,899,000 2,398,000 (703,000) (7,704,000)
001 Exercise
In the light of solution of example 101, please suggest appropriate course of action to governing body to deal
with negative cash flow in the 3rd and 4th quarter of planning period.
100
002Exercise
The Program & Financial Planning team of Star NGO has prepared annual budget for the year ended 30th
September 2013 and its extracts stated as under
Budget information
 Average monthly program activities cost Rs 3,500,000

 Monthly salary expense Rs 1,800,000
 NGO plans to purchase vehicle Rs 6,500,000 in the month of July 2013
 Six advance office rent Rs 1,600,000 will be paid to Land Lord on 1-10-2012 and 1-04-2013
 Monthly internet fee Rs 185,000
 Monthly fuel cost Rs 350,000
 Monthly security guard fee: Rs 74,000
 Monthly vehicle rental cost Rs 500,000
Liquidity and other information
 Planning period: 1-10-2012 to 30-09-2013

 Opening cash and bank balance as at 1-10-2012: Rs 12,000,000
 Donor will disburse funds Rs 15,000,000 on 31 Dec 2012, 31 March 2013, 30 June 2013 and 30 Sept
2013 respectively
Required:
Prepare annual cash budget for the planning period ended 30th September 2013. The cash budget should be
divided into quarters of 90 days each.
101
Controls over Actual Cash Flows
The management exercise control over actual cash flow through petty cash book, bank book and bank
reconciliation statement.
Petty cash book
There are two ways of keeping petty cash:
 fixed float or imprest system

 variable or non-imprest system
Fixed Float or Imprest Method
With the imprest system you have a fixed float of, say, Rs 25,000 and when the cash balance gets low, you
top up the float by exactly the same amount that you have spent since the float was last reimbursed.
Example:
Receipts/vouchers for cash spent total: Rs 22,000

Cash remaining in cash box counted: Rs 3,000
TOTAL FLOAT: Rs 25,000
Reimbursement cheque written for: Rs 22,000
An advantage of this system is that at any time you count the money plus vouchers, they should always add
up to the fixed float amount. Also, it is much easier to incorporate petty cash spending into the accounts as
the reimbursement cheque is entered in the analysed Bank Book.
102
Variable float or non-imprest method
An alternative is to draw cash from the bank in round sums as required.
Daily cash count
The daily cash count should be performed to reconcile the cash in hand balance as per physical cash count
and petty cash book.
Format of cash count sheet
Star NGO
Cash count sheet
Date of cash count: 26-11-2012
Time of cash count: 6:00 pm
Denomination Quantity Amount

Rupees
5,000 2 10,000
1,000 1 1,000
500 1 500
100 5 500
50 4 200
20 5 100
10 10 100
5 2 10
Coins 100
Cash in hand as per physical count 12,510
Cash in hand as per petty cash book 12,510
Difference Surplus / (Short) Nil
Signatures of responsible officials
Physical cash counted by Manager Finance

Cash count sheet reviewed by Director Finance
Bank Book
The Bank Book – or Cash Book or Cash Analysis Book – is the main book of account for recording bank
transactions (ie ‘cash’ transactions). In the NGO sector the separate bank account has been opened for each
project as per donor regulations. The separate bank account provides requisite assurance to funding agencies
103
regarding the transparency and accountability pertains to the utilization of funds for the accomplishment of
project objectives.
003Exercise
Transactions
SR no Description Amount
Rupees
1 Funds received from donor agency 50,000,000
2 Buy a car 5,000,000
3 Buy office supplies 45,000
4 Pay salaries 3,300,000
5 Pay office rent 200,000
6 Pay security guard fee 30,000
7 Buy Laptops 450,000
8 Pay honorarium to resource persons 150,000
9 Pay medical reimbursement to employees 35,000
10 Pay staff development allowance to employees 100,000
11 Buy generators 2,500,000
12 Pay printing cost of annual News Letter 800,000
13 Pay office renovation and refurbishment 400,000
14 Pay vehicle rentals 125,000
15 Pay post paid mobile charges to Telenor 250,000
104
Format of Bank Reconciliation Statement
Star NGO
Bank Reconciliation Statement
For the month of November 2012
Bank Name: Muslim Commercial Bank Limited, Bank Account #: 9010349726

GL Account code of Bank Book: 1024, Currency code: PKR
Opening balance as per bank book xxx

Add deposits xxx
Deduct period disbursements (xxx)
Ending balance as per bank book xxx
Balance as per bank statement xxx

Deduct outstanding cheques (xxx)
Add outstanding deposits xxx
Other reconciling items xxx
Adjusted balance xxx
Difference between adjusted balance and bank book -
Area of responsibility Designation Signatures

Prepared by Finance Officer
Reviewed by Manager Finance
Approved by Citizen’ Voice
Chief of PartyProject
105
Purpose of bank reconciliation statement
To check the accuracy of cash at bank by reconciling the bank balance as per bank book and bank statement
Bank statement
The bank prepares statements for its clients from its own point of view. The bank statement enables the
managers to cross verify the cash inflows and outflows during the period under review.
Reasons of differences
 Timing differences
 Transactions in bank statement not on bank book
 Errors
Examples of differences
Timing differences
 Outstanding cheques
 Out deposits / lodgments
Items on bank statement not in bank book
 Bank charges
 Standing orders
 Direct debits
 Direct credits
 Dishonored cheques
Errors
1. Casting errors
 Bank book errors 2. Transpositions
 Bank statement errors 3. Omissions
4. Duplications
Cheques may be dishonored due to following reasons
 Posted dated cheques

 Stale cheques
 Discrepancy in writing amounts[Narrative and numerical]
 Stop payment instructions to bank from payer
 Insufficient funds in the bank account of payer
Direct debits: An authority given by NGO management to third party to debit the payer’s bank account on
specified date.
106
Standing orders: Instructions given by NGO management to bank to pay fixed amount on predefined date
to third party.
Procedures for the preparation of bank reconciliation statement
1. Monthly bank reconciliation statement of each bank account should be prepared, reviewed and
approved by relevant responsible officials.
2. Compare deposits listed in the bank statement with the deposits shown in the bank book. Any
deposits not yet recorded by the bank are deposits in transit and should be added to the balance
shown in the bank statement.
3. Compare each cheque on bank statement with the corresponding entry in the bank book. Any
cheque issued but not yet paid by the bank should be listed as outstanding cheque to be deducted
from the balance reported in the bank statement.
4. Deduct to the balance any credit memoranda issued by the bank that have not been recorded by the
depositor.
5. Make appropriate adjustments to correct any errors in either the bank statement or bank book.
6. Determine that the adjusted balance of the bank statement is equal to the bank book balance.
102Example
The Star NGO has opened separate bank for Democratic Education Project in Muslim Commercial Bank Ltd.
The Manager Finance presented following bank book for the month of November 2012 to Director Finance
and Chief of Party for review purposes
Debit Credit Balance

Rs Rs Rs
Funds received from donor agency 50,000,000 50,000,000
Buy a car 5,000,000 45,000,000
Buy office supplies 45,000 44,955,000
Pay salaries 3,300,000 41,655,000
Pay office rent 200,000 41,455,000
Pay security guard fee 30,000 41,425,000
Buy Laptops 450,000 40,975,000
Pay honorarium to resource persons 150,000 40,825,000
Pay medical reimbursement to employees 35,000 40,790,000
Pay staff development allowance to employees 100,000 40,690,000
Buy generators 2,500,000 38,190,000
Pay printing cost of annual News Letter 800,000 37,390,000
Pay office renovation and refurbishment 400,000 36,990,000
Pay vehicle rentals 125,000 36,865,000
Pay paid mobile charges to Telenor 250,000 36,615,000
Total 50,000,000 13,385,000
Finance officer also obtained bank statement for the month of November 2012 from Muslim Commercial
Bank Ltd. The Finance Officer identified following difference between bank book and bank statement.
 Suppliers of generator, laptop and office supplies have not yet presented cheques to bank for
payment
 Cheque of telenor was dishonored due to discrepancy in writing amounts in narration and numbers
 Bank has credited bank profit of Rs 320,000 but it is not recorded in the bank book
107
 Bank has deducted bank charges on cash withdrawals of Rs 55,000 but it is also not
accounted in the bank book
 Balance as per bank statement as at 30th November 2012: Rs 40,125,000
Required: Director Finance instructed manager finance to prepare bank reconciliation statement for review
and approval purposes
Star NGO
Bank Reconciliation Statement
GL code 1050168 Currency Code PKR
Bank Name Muslim Commercial Bank Ltd Bank Account No 7A-8506750
Amount
Opening balance as per bank book Nil
Add deposits 50,000,000
Deduct period disbursements 13,385,000
End balance as per bank book 36,615,000
Balance as per bank statement as at 30-11-2012 40,125,000

Deduct outstanding cheques (3,245,000)
Add outstanding deposits -
Other reconciling items
 Bank charges 55,000
 Bank profits (320,000)
Adjusted Balance 36,615,000
Difference between adjusted balance and bank book Nil
Signatures of responsible personnel
Area of responsibility Designation Signatures Dated
Prepared by Manager Finance 03-12-2012
Reviewed by Director Finance 03-12-2012
Approved Chief of Party 03-12-2012
108
003Exercise
The XYZ NGO has opened separate bank for Democratic Education Project in ASKARI Commercial Bank
Ltd.
The Manager Finance presented following bank book for the month of November 2012 to Director Finance
and Chief of Party for review purposes
Debit Credit Balance

Rs Rs Rs
Funds received from donor agency 75,000,000 75,000,000
Buy a car 8,000,000 67,000,000
Buy office supplies 178,000 66,822,000
Pay salaries 6,750,000 60,072,000
Pay office rent 800,000 59,272,000
Pay security guard fee 125,000 59,147,000
Buy Laptops 950,000 58,197,000
Pay honorarium to resource persons 350,000 57,847,000
Pay medical reimbursement to employees 68,000 57,779,000
Pay staff development allowance to employees 1,250,000 56,529,000
Buy generators 5,000,000 51,529,000
Pay printing cost of annual News Letter 1,700,000 49,829,000
Pay office renovation and refurbishment 1,400,000 48,429,000
Pay vehicle rentals 2,300,000 46,129,000
Pay paid mobile charges to Telenor 670,000 45,459,000
Total 75,000,000 29,541,000
Finance officer also obtained bank statement for the month of November 2012 from ASKARI Commercial
Bank Ltd. The Finance Officer identified following difference between bank book and bank statement.
 Suppliers of car, Rent A CAR Company and Land Lord have not yet presented cheques to bank for
payment
 Salary cheque was dishonored due to discrepancy in writing amounts in narration and numbers
 Bank has credited bank profit of Rs 720,000 but it is not recorded in the bank book
 Bank has deducted bank charges on cash withdrawals of Rs 234,000 but it is also not
accounted in the bank book
 Balance as per bank statement as at 30th November 2012: Rs 63,795,000
Required: Director Finance instructed manager finance to prepare bank reconciliation statement for review
and approval purpose
109
OFT MANUAL: FM Payroll Management SECTION – 6
Overview of Payroll Management
- Personal files
-Advances and Loans to
employees Employment contracts NGO policies for employee
-Leave records benefits
-Income tax deductions
Payroll
Management
Attendance sheets and / or

Approved salary budgets
Time Summary Sheets
Post employment benefits; Recording and payment of salaries

Provident fund and gratuity
fund
110
Definition of payroll management
The administration of the financial record of employees' salaries, incentives, deductions, net pay, and
contributions
Objectives of payroll management
 To ensure that salaries are paid in accordance with employment contracts, approved budgets and
policies of NGO
 To ensure that complete and accurate record of salary payments have been maintained
 To ensure that appropriate level of controls exist over statutory and non-deductions
 To ensure that proper record of employee benefits such provident fund and gratuity fund has been
maintained
Payroll Procedures
The payroll procedures encompass following elements
1. Personal files
2. Salary advances and loans
3. Preparation of payroll
4. Part-time employees
5. Accounting entries
6. Incentives
111
Personal Files
The Human Resource department should maintain proper personal files of employees.
The main sources of information for personal files encompass;
 Engagement letters
 Notification of changes in basic pay
 Leave entitlement
 Discharges
 Disciplinary actions
 Promotion notifications
The HR department should regularly check the personal files to ensure completeness and reliability of HR
data
Salary advance and loans
 Policy and procedures for salary advance and loan should be designed by CEO and approved by
governing body
 Policy should encompass the legitimate reasons for loans and advances, maximum amount of
advances / loans, repayment schedule and mode of payment
 The standard forms should be used for requesting and payment of loans / advances
 The loan / salary advance application forms should be reviewed and approved by the appropriate
competent authorities
 Loan / advance salary should be paid by cross cheque or electronic funds transfer
 Receipt acknowledgement should be signed by requesting employee
112
Effort Reporting / Timekeeping
Timekeeping Systems: Key Points
 Employees are responsible for preparing their own timecard/sheet
 Employees should be provided with instructions how their work is to be charged
 Timecards/sheets must be prepared in ink or on a spreadsheet
 Time record must be completed as work is performed
 Timecard/sheet or spreadsheet should be signed by employee and supervisor
 Corrections should be cross-out and new entry with no erasures or whiteouts
-Corrections should be signed by employee and supervisor
-An explanation for correction should be properly recorded
113
Format of Standard Timekeeping Sheet

Name of Employee Designation Department Reporting week
Mr.Stevenson Program Manager Program 26 to 30 Nov 2012
Description of task performed Total Date Democratic Women Peace
daily Education Rights building
hours Project # Project # Project #
worked DIFD-001 UN-314 AID-842
Allocation of hours
Prepare monthly program activity plan 3 hour 26-11-12 1 hour 1 hour 1 hour
Discuss monthly activity plan with 1 hour 26-11-12 1 hour
Program Director for review and
approval purposes
Prepare work done report of last 3 hour 26-11-12 1 hour 1 hour 1 hour
week (19 to 23 Nov 2012)
Review work done report of program 1 hour 26-11-12 1 hour
officers
Prepare monthly performance report 6 hour 27-11-12 6 hour
for donor agencies
Meeting with CEO 1 hour 27-11-12 1 hour
Attend weekly Program Management 1 hour 27-11-12 1 hour
Team
Organize one day seminar on 8 hour 28-11-12 8 hour
democratic education
Organize focus group discussion with 3 hour 29-11-12 3 hour
community members and
implementing partners
Field visits in target areas 1 hour 29-11-12 1 hour
Prepare draft narrative report for 4 hour 29-11-12 4 hour
DIFD
Prepare News letter for Women 4 hour 30-11-12 4 hour
Rights Project
Prepare training manual 3 hour 30-11-12 3 hour
Review narrative of Sub-Grantees 1 hour 30-11-12 1 hour
Total 40 hour 7 hour 12 hour 21 hour
Prepared by employee: Mr.Stevenson dated 30-11-2012
Reviewed by supervisor: Ms Donaguhe dated 30-11-2012
114
Test your understanding
Under USG regulation; OMB A-122: Cost Principle the project allowable expenses should fulfill
the criteria of reasonability and allocability. Let’s understand cost principles with following
scenario
The total weekly salary Rs. 54,000 of Program Manager
Actual hours worked on USAID project are 21 hours during the reporting week from Nov 26 to Nov 30
2012.
Which of the following methods of computation and allocation of salary expense are acceptable
and justifiable under OMB A-122?
Option Computation Allocated cost to

USAID
A Rs 54,000 / No of Projects Rs 18,000
B Rs 54,000 Rs 54,000
C Rs 54,000 / 40 hours x 21 hours Rs 28,350
D Rs 54,000 / 40 hours x 19 hours Rs 25,650
Test your understanding
The Star NGO has been implementing 9 projects with different donor agencies
The total monthly salary Rs. 550,000 of CEO
Total 176 working hours of CEO in the month of November 2012
He spent 80 hours on USAID project during the reporting month; Nov 01 to Nov 30 2012.
Which of the following methods of computation and allocation of salary expense are acceptable
and justifiable under OMB A-122 and other best practices for allocation of expenses?
Option Computation Allocated cost to

USAID
A Rs 550,000 / 9 Projects Rs 61,111
B Rs 54,000 Rs 550,000
C Rs 54,000 / 176 hours x 96 hours Rs 300.000
D Rs 54,000 / 176 hours x 80 hours Rs 250,000
115
Payroll Preparation
 HR Department should prepare and submit the list of incoming and outgoing employees to Finance
Department
 HR Department should provide leave deduction details to Finance Department
 Administration should provide time summary sheets to HR and Finance department for review and
processing
 Salary rates should be consistent with employment contracts.
 Finance team should exercise due care during the computation of statutory and non-statutory
deductions
 Statutory deductions should be deposited into Government Treasury within the prescribed time.
 Payroll sheets should be reviewed and approved by competent authorities
 Salaries should be paid by cross cheque or electronic funds transfer
 Salary slips should be provided to employees for information and record purposes
116
101Example
On 1st November 2012, Star NGO hired following employees for Democratic Education Project
Basic salary per month

Rupees
Chief of Party 333,333
Grant Manager 138,889
Manager Finance 83,333
Director Finance 388,889
Donor agency and governing body have approved following allowances of project staff
 House rent allowance 45% of basic salary

 Conveyance allowance 10% of basic salary
 Medical allowance 10% of basic salary
 Cost of living allowance 15% of basic salary
Non-statutory deductions
 Loan Rs 10,000 from the salary of Manager Finance

 Advance salary Rs 20,000 from the salary of Grant Manager
Required: Prepare salary sheet for the month of November 2012
Solution
Star NGO
Payroll sheet for the month of November 2012
Designati Basic Allowances Gross Deductions Net

on salary COL HR Travel Medical salary Loan Advance salary
Rupees
333,33
COP 3 50,000 150,000 33,333 33,333 600,000 600,000
138,88
GM 9 20,833 62,500 13,889 13,889 250,000 20,000 230,000
MF 83,333 12,500 37,500 8,333 8,333 150,000 10,000 140,000

388,88
DF 9 58,333 175,000 38,889 38,889 700,000 700,000
Total 944,44 141,66 425,00 1,700,00 1,670,00

4 7 0 94,444 94,444 0 10,000 20,000 0
117
001 Exercise
On 1st November 2012, Star NGO hired following employees for Democratic Education Project
Basic salary per month

Rupees
Chief of Party 444,444
Grant Manager 166,667
Manager Finance 250,000
Director Finance 361,111
Donor agency and governing body have approved following allowances of project staff
 House rent allowance 45% of basic salary

 Conveyance allowance 10% of basic salary
 Medical allowance 10% of basic salary
 Cost of living allowance 15% of basic salary
Non-statutory deductions
 Loan Rs 100,000 from the salary of Manager Finance

 Advance salary Rs 120,000 from the salary of Grant Manager
Required: Prepare salary sheet for the month of November 2012
102Example
On 1st July 2012, Star NGO hired following employees for Democratic Education Project
Basic salary Annual Tax Gross

per month exemption salary per
up to10% of month
Basic Salary
Chief of Party 444,444 533,333 800,000
Grant Manager 166,667 200,000 300,000
Manager Finance 250,000 300,000 450,000
Director Finance 361,111 433,333 650,000
The donor agency and governing body have approved following allowances of project staff
House rent allowance 45% of basic salary, conveyance allowance 10% of basic salary, utilities allowance 10%
of basic salary and provident fund allowance 15% of basic salary
The CEO has entrusted you the task to calculate total annual salary income, taxable salary income, tax
liability and per month tax deduction under section 149 of Income Tax Ordinance 2001
118
Current Tax year: 1-07-2012 to 30-06-2013
Tax rates as per clause IA of division I of Part I of the First Schedule, Income Tax Ordinance 2001
SR Taxable income Rate of tax

no
1. 0 to Rs.400,000 0%
2. Rs.400,000 to Rs.750,000 5% of the amount exceeding Rs. 400,000
3. Rs.750,000 to Rs.1,500,000 Rs. 17,500+10% of the amount exceeding Rs.750,000]
4. Rs.1,500,000 to Rs.2,000,000 Rs.95,000+15% of the amount exceeding Rs.1,500,000
5. Rs. 2,000,000 to Rs.2,500,000. Rs. 175,000 + 17.5% of the amount exceeding Rs.2,000,000/-
6. Rs.2,500,000 and above Rs.420,000+ 20% of the amount exceeding Rs. 2,500,000/-
Under Income Tax Law, the employees of NGO can claim exemption of medial allowance up to 10% of basic
salary.
Required: Calculate income tax deduction and prepare payroll sheet for the month of July 2012
Tax computation schedule
1 11=8+1 12=11/1
2 3=2 x 12 4 5=3-4 6 7=5-6 8 9 10=7 x 9 0 2
Taxable Taxable Tax Tax Total Per
Per income income liability liability Annual month
mont up to above up to above Tax tax
h Annual Medic Taxable 2.5 2.5 2.5 Rate 2.5 liability liability
salary salary al salary million million million of tax million
800,00
COP 0 9,600,000 533,333 9,066,667 2,500,000 6,566,667 420,000 20% 1,313,333 1,733,333 144,144
300,00
GM 0 3,600,000 200,000 3,400,000 2,500,000 900,000 420,000 20% 180,000 600,000 50,000
450,00
MF 0 5,400,000 300,000 5,100,000 2,500,000 2,600,000 420,000 20% 520,000 940,000 78,333
650,00
DF 0 7,800,000 433,333 7,366,667 2,500,000 4,866,667 420,000 20% 973,333 1,393,333 116,111
119
Star NGO
Designat Basic Allowances Gross Deductions Net

ion salary PF HR Travel Utility salary PF Tax salary
Rupees
COP 444,444 66,667 200,000 44,444 44,444 800,000 66,667 144,144 589,189
GM 166,667 25,000 75,000 16,667 16,667 300,000 25,000 50,000 225,000
MF 250,000 37,500 112,500 25,000 25,000 450,000 37,500 78,333 334,167
DF 361,111 54,167 162,500 36,111 36,111 650,000 54,167 116,111 479,722

1,222,22 183,33 550,00 122,22 122,22 2,200,00 183,33 388,58 1,628,07
Total 2 3 0 2 2 0 3 8 9
002Exercise
On 1st October 2012, Star NGO hired following employees for Democratic Education Project
Basic salary Tax exemption Gross salary

per month up to 10% of Basic per month
Salary ( October
2012 to June
2013)
Chief Executive Officer-CEO 250,000 225,000 450,000
Director Programs 166,667 150,000 300,000
Director HR 111,111 100,000 200,000
Director Finance 77,778 70,000 140,000
The donor agency and governing body have approved following allowances of project staff
House rent allowance 45% of basic salary, conveyance allowance 10% of basic salary, utilities allowance 10%
of basic salary and provident fund allowance 15% of basic salary .The Governing body has entrusted you the
task to calculate total annual salary income, taxable salary income, tax liability and per month tax deduction
under section 149 of Income Tax Ordinance 2001
120
Current Tax year: 1-07-2012 to 30-06-2013
Tax rates as per clause IA of division I of Part I of the First Schedule, Income Tax Ordinance 2001

no
no
1. 0 to Rs.400,000 0%
2. Rs.400,000 to Rs.750,000 5% of the amount exceeding Rs. 400,000
3. Rs.750,000 to Rs.1,500,000 Rs. 17,500+10% of the amount exceeding
Rs.750,000]
4. Rs.1,500,000 to Rs.2,000,000 Rs.95,000+15% of the amount exceeding
Rs.1,500,000
5. Rs. 2,000,000 to Rs.2,500,000. Rs. 175,000 + 17.5% of the amount exceeding
Rs.2,000,000/-
6. Rs.2,500,000 and above Rs.420,000+ 20% of the amount exceeding Rs.
2,500,000/-
Under Income Tax Law, employees of NGO can claim exemption of medial allowance up to 10% of basic
salary.
Required: Calculate income tax deduction and prepare payroll sheet for the month of October
2012
121
Payroll Control Statement
The finance department prepares payroll control statement to control and reconcile encompass the
movements in the work force strength, funding and budgeting of payroll cost and reconciliation of total basic
salary, deductions, net salary and payments
Format of payroll control statement
Section A: Analysis of variation in the workforce
Departments November 2012 October 2012 Difference

Increase / (Decrease)
No of employees
Program 100 110 (10)
Finance 15 12 3
HR & Administration 20 20 -
Total 135 142 (7)
Section B: Comparison of Approved budget and funding secured
Departments Annual Approved Budged- Funding obligated or Funding surplus / (gaps )

July 2012 to June 2013 received
Rupees
Program 85,000,000 40,000,000 (45,000,000)
Finance 20,000,000 14,000,000 (6,000,000)
HR & Administration 35,000,000 10,000,000 (25,000,000)
Total 140,000,000 64,000,000 (76,000,000)
Section C: Budget and actual payroll cost to date
Departments Annual Approved Salary expense to date Budget balance

Budged
Rupees
Program 85,000,000 20,000,000 65,000,000
Finance 20,000,000 5,000,000 15,000,000
HR & Administration 35,000,000 8,000,000 27,000,000
Total 140,000,000 33,000,000 107,000,000
Section D: Salary sheet analysis of current reporting month

Gross salary Deductions Net salary Paid by CHQ Paid by EFT Paid by Cash
Total Salary 7,500,000 800,000 6,700,000 1,700,000 5,000,000 -
122
103Example
The Finance department presented following salary sheets to CEO for review purposes.
Departme No of Basic Allowances Gross Loan Net salary

nt employees salary COL HR Travel Utility salary
Program 50 1,666,667 250,000 750,000 166,667 166,667 3,000,000 80,000 2,920,000
Finance 5 444,444 66,667 200,000 44,444 44,444 800,000 40,000 760,000
HR & ADM 15 666,667 100,000 300,000 66,667 66,667 1,200,000 150,000 1,050,000
Total 70 2,777,778 416,667 1,250,000 277,778 277,778 5,000,000 270,000 4,730,000
Payroll sheet for the month of October 2012
Departme No of Basic Allowances Gross Loan Net salary

nt employees salary COL HR Travel Utility salary
Program 45 1,388,889 208,333 625,000 138,889 138,889 2,500,000 80,000 2,420,000
Finance 3 277,778 41,667 125,000 27,778 27,778 500,000 40,000 460,000
HR & ADM 11 500,000 75,000 225,000 50,000 50,000 900,000 150,000 750,000
Total 59 2,166,667 325,000 975,000 216,667 216,667 3,900,000 270,000 3,630,000
The details of annual budget, funds obligated and salary cost in the month of July 2012, August
2012 and September 2012 are stated as under
Departments Annual Funds July 2012 August September

budget obligated 2012 2012
Rs Rs Rs Rs Rs
Program 30,000,000 15,000,000 1,400,000 2,000,000 2,500,000
Finance 10,000,000 8,000,000 400,000 400,000 500,000
HR & Administration 15,000,000 10,000,000 600,000 600,000 900,000
Total 55,000,000 33,000,000 2,400,000 3,000,000 3,900,000
The Star NGO has been paying salaries through electronic funds transfer process. Required:
The CEO entrusted you a task to prepare payroll control sheet for the review of audit
committee
123
Star NGO
Payroll Control Statement
Section A: Analysis of variation of work force

Department November 2012 October 2012 Difference
Increase ( Decrease)
Number of Employees
Program 50 45 5
Finance 5 3 2
HR & Administration 15 11 4
Total 70 59 11
Section B: Comparison of approved budget with obligated / received funds

Department Annual Approved Funding obligated Funding surplus /
Budged-July 2012 to June or received (gaps )
2013
Rs Rs Rs
Program 30,000,000 15,000,000 15,000,000
Finance 10,000,000 8,000,000 2,000,000
Total 55,000,000 33,000,000 22,000,000
Section C: Budgeted and actual payroll cost

Department Annual Approved Salary expense Budget balance
Budged to date
Rs Rs Rs
Program 30,000,000 11,400,000 18,600,000
Finance 10,000,000 2,600,000 7,400,000
Total 55,000,000 18,200,000 36,800,000
Section D: Salary sheet analysis of current reporting month

Department Gross Deductions Net Paid by Paid by Paid by Cash
salary salary CHQ EFT
Rs Rs Rs Rs Rs Rs
Program 3,000,000 80,000 2,920,000 2,920,000
Finance 800,000 40,000 760,000 760,000
HR & ADM 1,200,000 150,000 1,050,000 1,050,000
Total 5,000,000 270,000 4,730,000 4,730,000
124
Recording and payment entries for payroll, deductions and contributions
● Journal voucher should be prepared for recording gross salary, deductions and net salary as per payroll sheet
● Payment voucher should be prepared for the net pay salary and deposit of contribution & deductions
Standard accounting entries scheme for payroll transactions
Transaction Description Debit Credit
Rupees Rupees
Recording of salary expense Salary Expense account xxx
Income tax payable account xxx
Provident fund payable account xxx
Advance salary account xxx
Loan account xxx
Accrued salary account xxx
Payment of salaries Accrued salary account xxx

Bank account xxx
Employer’s contribution for Provident fund expense account xxx

provident fund Provident fund payable account xxx
Deposit of income tax deductions Income tax payable account xxx

into government treasury Bank account xxx
Deposit of provident fund Provident fund payable account xxx

contributions into designated Bank account xxx
bank account of Fund xxx
125
104Example
Record accounting entries of payroll as per payroll information stated in the example 102
Further information
 The employer and employee’ provident fund contribution is equal as per the approved policy
 Provident fund contributions have been deposited within 5 working days
 Income tax deductions have been deposited within the prescribed statutory time frame
Solution
Rupees Rupees
Recording of salary Salary Expense account 2,200,000

expense Income tax payable account 329,722
Provident fund payable account 183,333
Accrued salary account 1,686,945
Payment of salaries Accrued salary account 1,686,945
Bank account 1,686,945
Employer’s contribution Provident fund expense account 183,333

for provident fund Provident fund payable account 183,333
Deposit of income tax into Income tax payable account 329,722

government treasury Bank account 329,722
Deposit of provident fund Provident fund payable account 366,666

contribution into Bank account 366,666
designated bank account of
Fund
126
Part time employees
 HR department should hire part-time employees with the prior written approval of competent
authority
 HR department should take into consideration the program needs and availability of budget at time
of recruitment of part-time employees
 HR department should maintain proper register of part-time employees
 Work done and hours of part-time employees should be reviewed by respective line manager
 Payment claim forms should be completed and submitted by the part-time employees to HR
Department for review
 HR department should forward payment claim forms to Finance for payment processing
 Payment claims should be settled through cross cheque or electronic funds transfer process
 Receipt acknowledgement forms should be signed by part-time employees for payment evidence
purposes
127
Incentives / employee benefits
 Incentive schemes should be formalized and documented in the policies and procedures manual
 The incentive strategies should be widely communicated and equitably applied
 Incentives should only be paid once earned or achieved.
 Incentives should not be paid in advance.
Incentive / employee benefits encompass:
 Paid annual and sick leaves, staff development allowance, medical expense reimbursement and non-
monetary benefits such as health insurance, life assurance, housing and cars;
 Post-employment benefits such as gratuity fund and provident fund;
 Long-service leave or other long-service benefits and long-term disability benefits;
 Termination benefits such redundancy compensation
128
Post employment benefits
The NGOs have been paying following key post employment benefits to employees
 Provident fund
 Gratuity fund
Standard policies and procedures for Provident fund
1. The contributory provident fund should be established under the terms and conditions of duly
approved trust deed from governing body
2. Trustees of provident fund should be nominated and appointed by governing body
3. The membership of provident fund should be remained optional for employees
4. The equal provident fund contributions should be made by NGO and employee
5. The rate of provident fund can only be revised with the prior written approval of governing body
6. Separate bank account should be opened and operated for provident fund
7. Separate books of accounts should be maintained for provident fund
8. The monthly provident fund contributions should be deposited in designated bank account
9. The proceeds of provident fund should only be invested in profitable and secured investment
schemes
10. The withdrawals can be made from provident fund for approved legitimate and admissible purposes
such as purchase of plot, construction of house, purchase of personal vehicle marriage of
brother/sister and children.
11. Provident fund should be paid to outgoing employees subject to the submission of satisfactory final
clearance documents and as per the prescribed provisions of trust deed of fund
Standard accounting treatment for provident fund
Section A: Accounting entries in the books of accounts of NGO

Rupees Rupees
Employee’ s Salary Expense account xxx
contribution of Provident fund payable account xxx
provident fund
Employer’s Provident fund expense account xxx

contribution for Provident fund payable account xxx
provident fund
Deposit of provident Provident fund payable account xxx

fund contribution Bank account xxx
129
Section B: Accounting entries in the books of accounts of Provident Fund
Transaction Account titles Debit Credit

Rupees Rupees
Receipt of periodic provident Bank account xxx
fund contributions Provident fund account xxx
Investment of provident fund Investment account xxx

proceeds Bank account xxx
Withdrawals from provident Provident fund account xxx

fund at the time of retirement Bank account xxx
Withdrawals from provident Employee Loan account xxx

fund at the time of approval of Bank account xxx
loan against PF contributions
Receipt of bank profit or Bank account xxx

dividend on invested funds Provident fund account xxx
Format of Provident Fund Schedule
Star NGO
Provident Fund Schedule
As at 30th November 2012
1 2 3 4 5 6 7 8
Nam Designatio Openin PF PF Withdrawal Return on Closin
e n g contributio contributio s investmen g
balance n of n of t balanc
Employee employer e
Rs Rs Rs Rs Rs Rs
Mr. A COP xxx xxx xxx (xxx) xxx xxx
Mr. B MF xxx xxx xxx (xxx) xxx xxx
Mr. C GM xxx xxx xxx (xxx) xxx xxx
Mr. D DF xxx xxx xxx (xxx) xxx xxx
Total xxx xxx xxx (xxx) xxx xxx
130
105Example
 On 1st November 2012,Star NGO established separate provident fund as per requirements of trust
deed
 Provident fund has been controlled and monitored by board of trustees
 As per approved PF policy both employer and employee contributes equally at the rate of 15%
 Separate bank account and books of accounts have been maintained for provident fund
 NGO invests proceeds of provident funds in the saving bank account
 COP obtains loan Rs 100,000 against his provident fund balance as per the approval of competent
authority
 Director finance withdraws provident fund Rs 60,000 as per the rules of trust deed
 Bank profit Rs 40,000 received on 30th June 2012 and it will be distributed to employees on pro-rata
basis
 Details of Employee’s Provident Fund contributions are stated as under
1 2 3 4 5 6 7 8 Total
Nov Dec Jan Feb March April May June
Rupees
COP 66,667 66,667 66,667 66,667 66,667 66,667 66,667 66,667 533,336
GM 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 200,000
MF 37,500 37,500 37,500 37,500 37,500 37,500 37,500 37,500 300,000
DF 54,167 54,167 54,167 54,167 54,167 54,167 54,167 54,167 433,336
Total 183,333 183,333 183,333 183,333 183,333 183,333 183,333 183,333 1,466,664
Required: Prepare accounting entries in the books of accounts (NGO and Fund) and provident
fund schedule as per the given scenario
131
Rupees Rupees
Employee’ s contribution of Salary Expense account 1,466,664
provident fund Provident fund payable account 1,466,664
Employer’s contribution for Provident fund expense account 1,466,664

provident fund Provident fund payable account 1,466,664
Deposit of provident fund Provident fund payable account 2,933,328

contribution Bank account 2,933,328
Section B: Accounting entries in the books of accounts of Provident Fund
Rupees Rupees
Receipt of periodic provident fund Bank account 2,933,328

contributions Provident fund account 2933,328
Investment of provident fund proceeds Investment account 2,933,328

Director Finance withdrawals provident Provident fund account 60,000

fund Bank account 60,000
COP obtains loan against provident Employee Loan account 100.000

fund balance Bank account 100,000
Receipt of bank profit Bank account 40,000

Provident fund account 40,000
132
Star NGO
Provident Fund Schedule As at 30th June 2013
1 2 3 4 5 6=2+3+4-5 7 8=6+7
Openin PF PF Withdra Balance Distributio Closing
g contributio contributio w before n of profit balance
balance n of n of profit on pro-rata
Employee Employer distributio basis
n
Rs Rs Rs Rs Rs Rs Rs
COP - 1,081,52
533,336 533,336 1,066,672 14,849 1
-
MF 200,000 200,000 400,000 5,568 405,568
-
GM 300,000 300,000 600,000 8,353 608,353
-
DF 433,336 433,336 60,000 806,672 11,230 817,902
- 40,000 2,913,34
1,466,664 1,466,664 60,000 2,873,344 4
003Exercise
 On 1st January 2013,Star NGO established separate provident fund as per the requirements of trust
deed
 As per approved PF policy both employer and employee contributes equally to fund
 Separate bank account and books of accounts have been maintained for provident fund
 NGO invests proceeds of provident funds in the saving bank account
 COP obtains loan Rs 120,000 against his provident fund balance as per the approval of competent
authority
 Director finance withdraws provident fund Rs 100,000 as per the rules of trust deed
 Bank profit Rs 130,000 received on 30th June 2012 and it will be distributed to employees on pro-rata
basis
 Details of Employee’s Provident Fund contributions are stated as under
1 2 3 4 5 6 Total
Jan Feb March April May June
COP 80.000 80.000 80.000 80.000 80.000 80.000 480,000
GM 70.000 70.000 70.000 70.000 70.000 70.000 420,000
MF 50,000 50,000 50,000 50,000 50,000 50,000 300,000

60,000 60,000 60,000 60,000 60,000 60,000 360,000
133
DF
Total 260,000 260,000 260,000 260,000 260,000 260,000 1,560,000
Required: On 30 June 2013, prepares accounting entries in the books of accounts (NGO and
Fund) and also prepares provident fund schedule for the review of audit committee
Standard policies and procedures of gratuity fund
1. The gratuity fund should be established under the terms and conditions of duly approved trust deed
from governing body
2. Trustees of gratuity fund should be nominated and appointed by governing body
3. Trustees should defined the eligibility criteria for the membership of gratuity fund
4. Eligibility criteria encompasses length of service, performance record, recommendation from line
manager and approval from competent authority
5. Formulae of gratuity fund; Length of service x last draw salary
6. Separate bank account should be opened for gratuity fund
7. Separate accounting records should be maintained for gratuity fund
8. NGO management should deposit periodic proceeds in the designated bank account of gratuity fund
under the prescribed terms and conditions of trust deed
9. The proceeds of gratuity fund should only be invested in profitable and secured investment schemes
10. The withdrawals can only be made from gratuity fund for approved legitimate and admissible
purposes such as purchase of plot, construction of house, purchase of personal vehicle marriage of
brother/sister and children.
11. Gratuity fund should be paid to outgoing employees subject to the submission of satisfactory final
clearance documents and prescribed provisions of trust deed
Standard accounting treatment for Gratuity Fund

Rupees Rupees
Annual Provision for gratuity Gratuity fund expense account xxx

fund Gratuity payable account xxx
Deposit of gratuity fund Gratuity payable account xxx

proceeds in separate bank Bank account xxx
account of Fund
134
Section B: Accounting entries in the books of accounts of Gratuity Fund

Rupees Rupees
Receipt of proceeds from Bank account xxx
NGO for gratuity fund Gratuity fund account xxx
Investment of gratuity fund Investment account xxx

proceeds Bank account xxx
Withdrawals from gratuity Gratuity fund account xxx

fund at the time of Bank account xxx
retirement
Withdrawals from gratuity Employee Loan account xxx

fund at the time of approval Bank account xxx
of loan against gratuity fund
Receipt of bank profit or Bank account xxx

dividend on invested funds Gratuity fund account xxx
135
106Example
 On 1st June 2012,Star NGO established separate gratuity fund as per the requirements of trust deed
 As approved policy the gratuity fund as computed as length of service multiplied by last draw basic
salary
 Separate bank account and books of accounts have been maintained for gratuity fund
 NGO invests proceeds of gratuity funds in the saving bank account
 Bank profit Rs 150,000 received on 30th June 2012 and it should be distributed to employees on pro-
rata basis
 Details of length of service and last draw basic salary are stated as under
Designations 1 2 3
Date of Length of service as Basic salary
appointment at 30th June 2013
Months Rupees
Chief of Party 01-07-2011 25 80.000
Grant Manager 01-07-2011 25 70.000
Manager Finance 01-07-2011 25 50,000
Director Finance 01-07-2011 25 60,000
Required prepare gratuity fund schedule as at 30th June 2003 and accounting entries for the books of
accounts of NGO and Fund
Designations 1 2 3 4 5 6
Date of Length of Basic salary Provision Distribution Gratuity
appointment service as as at 30th for gratuity of bank profit fund as at
at 30th June June 2013 30 June
2013 2012
Years Rupees Rupees Rupees Rupees
Chief of Party 01-07-2011 2.08 250,000 520,83 61,927 582,760
Grant Manager 01-07-2011 2.08 166,667 347,223 41,284 388,507
Manager Finance 01-07-2011 2.08 111,111 231,481 27,523 259,004
Director 162,038 19,266 181,304

Finance 01-07-2011 2.08 77,778
Total 1,261,575 150,000 1,411,575
136
Rupees Rupees
Annual Provision for Gratuity fund expense account 1,261,575

gratuity fund Gratuity payable account 1,261,575
Deposit of gratuity fund Gratuity payable account 1,261,575

proceeds in separate Bank account 1,261,575
bank account of Fund
Section B: Accounting entries in the books of accounts of Gratuity Fund
Rupees Rupees
Receipt of proceeds from NGO for Bank account 1,261,575

gratuity fund Gratuity fund account 1,261,575
Investment of gratuity fund proceeds Investment account 1,261,575

Receipt of bank profit or dividend on Bank account 150,000

invested funds Gratuity fund account 150,000
137
OFT MANUAL: FM Financial Audits SECTION – 7
FINANCIAL AUDITS
8.1 Introduction to Audit of General Purpose Financial Statements
8.1.1 Why do NGOs need audit?
Audits are important for NGOs as they demonstrate a commitment to transparency and accountability and
bring credibility to the NGO. It is also a legal requirement in most countries to have the financial statements
reviewed by an independent auditor once a year.
NGO operations and audit
Internal controls and Disburement of funds to

compliance requirements employees, beneficiaries,
Submission of Project with applicable laws, sub-conractors / sub-
application for funding regulations and contractual recipients, suppliers of goods
terms and services
Submission of narrative
Implemnetation of project Performance and financial
Approval of project activities
proposal and budget reportsto donor agencies
Acquisiton or assistance Receipt of funds from Audit of Finanical

agreement between NGO donor agencies Statements
and donor agency
138
8.2 What is assurance?
The governing body, regulators, donor agencies and other stakeholders need assurance from independent
practitioner regarding the truthfulness and fairness of reported financial figures pertain to transactions and
events of NGOs.
8.2.1 Definition of assurance
“An engagement in which a practitioner expresses a conclusion designed to enhance the degree of
confidence of the intended users other than the responsible party about the outcome of the evaluation or
measurement of a subject matter against criteria”
8.2.2 Five Elements of assurance
The definition of assurance contains following five key elements
Tripartitie relationship
Subject matter
Sufficient and appropirate

Criteria evidence Written report
8.2.3Example of 5 elements of assurance engagement
A. Tripartite relationship; USAID, Prime Recipient and Auditors

B. Subject under scrutiny; Project financial report, organizational financial statements, Internal
controls, compliance with applicable Laws, Regulations and contractual terms, cost sharing financial
information and Schedule of computation of indirect cost rates
C. Suitable criteria; Laws, Regulations , OMB Circulars A-122, FAR, CFR, ADS,AIDAR, GAAP,
Guidelines of OIG for financial audits contracted by foreign recipients, CIBs and AAPDs
139
D. Sufficient appropriate audit evidence; project transactions should be supported by adequate,

reliable and relevant accounting records
E. Written report; Submission of written audit reports to intended users (Federal Audit
Clearinghouse / USAID). Auditor gives assurance on Fund Accountability Statement, Internal
Controls, Compliance with laws, regulations and contractual terms, Schedule of computation of
Indirect Cost Rate, General Purpose Financial Statements of Recipient and Cost Sharing Schedule
Exercise to identify 5 elements of assurance engagement
NGO management succeeded to obtain donor funding for the implementation of peace building project.
NGO management spent Rs 34,144,000 (Equivalent USD 352,000) during the fiscal year; 1st October 2011 to
30th September 2012. The Governing body and donor agency approved appointment of English Chartered
Accountants as auditors for the financial audit of financial statements for the year ended 30th September
2012. The appointment letter contains scope of audit; fund accountability statement, internal controls,
compliance with statutes, regulations, contractual terms, indirect cost rates, cost sharing and organizational
financial statements. Under the terms of award, the written report should be submitted to USAID within 30
day of receipt of audit report or after 9 months from the end of fiscal year 30th September 2012 (30th June
2013) whichever is earlier.
Requirement: Identify 5 elements of assurance from given scenarios
8.2.4 Types of assurance
Type of assurance
Reasonable assurance Limited assurance
High level assurance Moderate assurance
Positive report Negative report
140
Reasonable assurance engagements-Audit of Funds Accountability Statement / Project

Financial Report
In a reasonable assurance engagement, the practitioner
• gathers sufficient appropriate evidence
It means that the practitioner has to do enough work to be able to draw rational conclusions
• concludes that the subject matter conforms in all material respects with identified suitable criteria
The important point for you to understand is that the practitioner is not saying that everything is absolutely
correct, but that, broadly speaking, the information given is reliable
• gives his report in the form of positive assurance
Limited assurance engagement-Review of Funds Accountability Statement
The practitioner:
• gathers sufficient appropriate evidence to be satisfied that the subject matter is plausible in the
circumstances
• gives his report in the form of negative assurance
Example of negative assurance report takes the form:
“Nothing has come to our attention that causes us to believe that the financial statements are not prepared,
in all material respects, in accordance with an applicable financial reporting framework”
141
8.3 Who is eligible to perform external audit
To be eligible to act as auditor, a person must be:
• member of a Recognized Supervisory Body (RSB), e.g. Institute of Chartered Accountants of Pakistan
And
• allowed by the rules of ICAP to be an auditor
Or
• Someone directly authorized by the state.
Individuals who are authorized to conduct audit work may be:
• sole practitioners
• partners in a partnership
• members of an LLP
To be eligible to act as auditor, a firm must be:
• controlled by members of a suitably authorized accountancy body

Or
• a firm directly authorized by the state.
142
8.3.1 Who may not act as auditor
Excluded by law
The law in most countries excludes those involved with managing the organization and those who have
business or personal connections with them.
For example;
• an officer (Director or secretary) of the NGO
• an employee of the NGO
• a business partner or employee of the above.
Excluded by professional ethics
 Business relations
 Personal relations
 Non audit services
 Long association with client / NGO
 Fee dependency
Examples to understand eligibility and / or non-eligibility to act as an auditor
- Mr Blue is a very experienced accountant and business consultant. He has a degree but no
professional qualifications. He is not allowed to act as an auditor.
- Ms Green is a qualified CA but has always worked in the accounting and finance departments of large
NGO and INGOs. She is not allowed to act as an auditor.
- Mr Red, FCA is a partner in an accounting practice and is authorized by the ICAP to conduct
audits. He may be allowed to act as an auditor.
- Mr Red’s brother runs a successful NGO in the town and asks Mr Red to become his auditor. Mr
Red must refuse because the relationship with his brother would bring his independence into
question.
Mr Red is also a non-executive director of a large local company Euphonium Ltd. Neither he, his firm, his
partners, nor any members of his staff, may act as auditor for Euphonium Ltd.
143
8.4 Audit objectives of financial statements
Audit objectives of financial

statements
Identify material misstatement in financial Ensure preparation of financial statements as per

statements applicable financial reporting framework
Overstatement of Understatement of 1. Applicable statutes and regulations

project implementation funds/ cash and bank 2. Agreements with donor agencies
cost balances 3. Agreements with implementing
partners
4. Contracts with suppliers of goods and
services
5. Approved project proposal and budgets
6. Standard operating procedures
7. Donor regulations for instance USAID
rules and regulations encompass OMB
circulars, FARs, CFRs, AIDARs, ADS,
AAPDs and CIBs
8. Generally Accepted Accounting
Principles-GAAP
144
8.4.1 Materiality
What is materiality?
Information is material if its omission or misstatement could influence the economic decisions of taken by
Funding agency n the basis of the fund accountability statements
Calculating materiality
Firms typically have a standard method for calculating a baseline materiality figure as part of the planning
process.
Common measures are:
• ½ – 1% of Grant income / Project incurred cost

• 1 – 2% of assets
But these are up to the judgment of the auditor. As a result, different firms use different measures.
145
8.4.2 Risk-based and procedural approaches to auditing
Procedural audit approach Risk based audit approach
Pre-determined audit procedures Risk based
Audit procedrues designed on the basis

of risk assessment exercise
146
8.4.3Definition of audit risk
Audit risk is defined as:
‘The risk of that the auditor expresses an inappropriate audit opinion when the financial
statements are materially misstated.’
Audit risk is further defined by way of a formula:
Audit Risk
Inherent risk Control risk Detection risk
8.4.3.1 Inherent risk

The risk of errors or misstatements due to the nature of the company and its transactions.
8.4.3.2 Control risk

Control risk is the risk of errors or misstatements because the company’s internal controls are not strong
enough to prevent, detect and correct them.
8.4.3.3 Detection risk

This is the risk that the auditor’s procedures do not pick up material misstatements.
147
8.5 Minimum audit evidence requirements
Financial statements and accounting records Donor files and internal control manual
1. Prepare final draft of financial 1. Complete donor files containing approved

statements project proposal, budgets, correspondence and
progress reports
2. Financial statements reconciled with
Trial balance & general ledger 2. Approved manual of policies and procedures
3. Complete files of vouchers
4. Reconciled payroll records and with HR

Files Program, M&E unit and Internal Audit Function
5. Finalize the reconciliations of fixed

assets and inventory records 1. Accurate and complete record of sub-grantees
6. Bank reconciliation statements and cash 2. Correspondence file of M&E

count sheets
3. Reports of M&E unit
4. Database of sub-grantees
5. Terms of reference of internal audit function

HR records
6. Internal audit reports
1. Complete Updated personal files of

all employees Administration
2. List of appointments and outgoing
employees 1. Procurement files
3. Proper documentation of increments 2. Files of contracts with suppliers of goods
and promotions and services
4. File of time summary sheets 3. Memorandum record of fixed assets and
inventory
5. Leave record of employees
4. Minutes of board and donor meeting
148
8.6 Stage in external audit
Selection and appointment of external auditors Audit report
Audit planning Completion and review
Audit Evidence gathering-Substantive

Audit Evidence gathering-Test of controls procedrues
8.6.1 Selection and appointment of external auditors
The constitution of NGO contains procedure for the appointment of external auditors. The governing body
delegates the authority to audit committee to identify suitable audit firm and thereafter formally negotiated
and finalize the terms and conditions for the acquisition of audit services.
The level of confidence of governing body, regulators and donor agencies increases when “A” rated audit
firms of RAB perform and issue audit report on financial statements of NGOs. The names of big six audit
firms; KPMG, A.F.Ferguson, Deloitte, Ernst & Young, Grant Thornton and BDO Chartered Accountants
The NGO management and external auditors finalized the terms of appointment in the audit engagement
letter and its details are stated as under.
149
8.6.2 Audit engagement letter / Audit services contract
Audit
Audit scope Standards Audit deliveables
fee
8.6.2.1 Key consideration for audit engagement letter
 The engagement letter will be sent before the audit.

 It specifies the nature of the contract between the audit firm and the client.
 It minimizes the risk of any misunderstanding of the auditor’s role.
 It should be reviewed every year to ensure that it is up to date but does not need to be reissued
every year unless there are changes to the terms of the engagement.
 The auditor must isse a new engagement letter if the scope or context of the assignment changes
after initial appointment.
 Many firms of auditors choose to send a new letter every year, to emphasize its importance to
clients.
150
8.6.2.2 Contents of audit engagement letter
The contents of a letter of engagement for audit services will include the following.
 Objective of the audit.

 Management’s responsibility for the financial statements.
 The scope of the audit including reference to legislation and professional standards.
 A description of audit procedures including their inherent limitations (e.g. for the discovery of
fraud and irregularities)
 The form of reports to be issued.
 Use of the work of internal audit.
 Risk assessment matters.
 The auditor’s use of specialists.
 Deadlines.
 Access to information.
 Communications between the auditor and the client (e.g. form of audit report, management
representations, letter of weakness, etc.).
 A reference to other services (normally covered in a separate letter).
 The basis of fees.
 Complaints procedures and jurisdiction.
 The need for co-operation and agreement of terms.
151
8.6.1 Audit Planning
Audit planning process

Materiality level
Risk assessment Law and regulations
Fraud
Audit Strategy
Going concern
Information Technology
Audit Plan
Design audit procedures
8.6.1.1 The planning process
The planning process consists of a number of phases and activities:
• assessing risk
• developing the audit strategy
• selecting the audit team
• assessing materiality
• selecting appropriate audit procedures.
152
8.6.2 Assessing risk
It’s all about risk
The whole of the next chapter of these materials is devoted to the concept of risk, but it is vital that you
understand that it is the auditor’s assessment of risk which underpins the whole audit.
It is the assessment of risk which determines:
• the audit strategy

• who should be on the audit team
• the potential impact of fraud
• the nature of the procedures to be carried out
• how much evidence needs to be gathered
so everything in the planning process is about the auditor’s response to assessed risk.
Relationship between risk and materiality
• the greater the risk of material misstatement

• the lower the level of materiality.
153
8.6.3 Audit Strategy
Knowledge of the NGO Assess Risk Analytical review

operations and projects
Scope Audit strategy

Timing
Direction
Select the audit team Deadlines and budgets Audit approach
8.6.4 Audit Plan
Audit strategy Audit plan Audit procedures
8.7 Audit Evidence
Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit
evidence includes both information contained in the accounting records underlying the financial statements
and other information.
8.7.1 Sufficient Appropriate Audit Evidence
154
The auditor shall design and perform audit procedures that are appropriate in the circumstances for the
purpose of obtaining sufficient appropriate audit evidence.
8.7.2 Sufficient audit evidence
The sufficiency and appropriateness of audit evidence are interrelated. Sufficiency is the measure of the
quantity of audit evidence. The quantity of audit evidence needed is affected by the auditor’s assessment of
the risks of misstatement (the higher the assessed risks, the more audit evidence is likely to be required) and
also by the quality of such audit evidence (the higher the quality, the less may be required). Obtaining more
audit evidence, however, may not compensate for its poor quality.
8.7.3 Appropriate audit evidence
Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its reliability in
providing support for the conclusions on which the auditor’s opinion is based. The reliability of evidence is
influenced by its source and by its nature, and is dependent on the individual circumstances under which it is
obtained.
155
8.7.4 Sources of audit evidence
Audit evidence
Substantive procedures Test of controls
Analytical procedures Test of details Control procedrues
8.8 Definition of Internal Controls
Internal control – The process designed, implemented and maintained by those charged with governance,
management and other personnel to provide reasonable assurance about the achievement of an entity’s
objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and
compliance with applicable laws and regulations. The term “controls” refers to any aspects of one or more of
the components of internal control.
156
8.8.1 Components of Internal Control
8.8.1.1 Control environment
The auditor shall obtain an understanding of the control environment. As part of obtaining this
understanding, the auditor shall evaluate whether:
(a) Management, with the oversight of those charged with governance, has created and maintained a culture
of honesty and ethical behavior; and
(b) The strengths in the control environment elements collectively provide an appropriate foundation for the
other components of internal control, and whether those other components are not undermined by
deficiencies in the control environment.
8.8.1.2 Risk Assessment
The auditor shall obtain an understanding of whether the entity has a process for:
(a) Identifying business risks relevant to financial reporting objectives;
(b) Estimating the significance of the risks;
(c) Assessing the likelihood of their occurrence; and
(d) Deciding about actions to address those risks.
If the entity has established such a process, the auditor shall obtain an understanding of it, and the results
thereof. If the auditor identifies risks of material misstatement that management failed to identify, the auditor
shall evaluate whether there was an underlying risk of a kind that the auditor expects would have been
identified by the entity’s risk assessment process. If there is such a risk, the auditor shall obtain an
understanding of why that process failed to identify it, and evaluate whether the process is appropriate to its
circumstances or determine if there is a significant deficiency in internal control with regard to the entity’s
risk assessment process.
If the entity has not established such a process or has an ad hoc process, the auditor shall discuss with
management whether business risks relevant to financial reporting objectives have been identified and how
they have been addressed. The auditor shall evaluate whether the absence of a documented risk assessment
process is appropriate in the circumstances, or determine whether it represents a significant deficiency in
internal control.
8.1.3 Information systems
The information system, including the related business processes, relevant to financial reporting, and
communication
The auditor shall obtain an understanding of the information system, including the related business processes,
relevant to financial reporting, including the following areas:
157
(a) The classes of transactions in the entity’s operations that are significant to the financial statements;
(b) The procedures, within both information technology (IT) and manual systems, by which those
transactions are initiated, recorded, processed, corrected as necessary, transferred to the general ledger and
reported in the financial statements;
(c) The related accounting records, supporting information and specific accounts in the financial statements
that are used to initiate, record, process and report transactions; this includes the correction of incorrect
information and how information is transferred to the general ledger.The records may be in either manual or
electronic form;
(d) How the information system captures events and conditions, other than transactions, that are significant
to the financial statements;
(e) The financial reporting process used to prepare the entity’s financial statements, including significant
accounting estimates and disclosures; and
(f) Controls surrounding journal entries, including non-standard journal entries used to record non-recurring,
unusual transactions or adjustments.
The auditor shall obtain an understanding of how the entity communicates financial reporting roles and
responsibilities and significant matters relating to financial reporting, including:
(a) Communications between management and those charged with governance; and
(b) External communications, such as those with regulatory authorities.
8.8.1.4 Control activities relevant to the audit
The auditor shall obtain an understanding of control activities relevant to the audit, being those the auditor
judges it necessary to understand in order to assess the risks of material misstatement at the assertion level
and design further audit procedures responsive to assessed risks. An audit does not require an understanding
of all the control activities related to each significant class of transactions, account balance, and disclosure in
the financial statements or to every assertion relevant to them.
In understanding the entity’s control activities, the auditor shall obtain an understanding of how the entity has
responded to risks arising from IT.
8.8.1.5 Monitoring of controls
The auditor shall obtain an understanding of the major activities that the entity uses to monitor internal
control over financial reporting, including those related
to those control activities relevant to the audit, and how the entity initiates remedial actions to deficiencies in
its controls.
8.9 Standard control procedures / activities
1. Authorization
2. Segregation of duties
3. Reconciliations
4. Comparison
5. Control documents
158
6. Physical controls
7. Computer controls
8.10 Audit procedures
1. Enquiry
2. Inspection
3. Re-calculations
4. Re-performance of procedures
5. Observation
6. Analytical procedures
7. External confirmations (Positive and Negative)
8.10.1 Inquiry
Inquiry consists of seeking information of knowledgeable persons, both financial and non-financial, within the
entity or outside the entity. Inquiry is used extensively throughout the audit in addition to other audit
procedures. Inquiries may range from formal written inquiries to informal oral inquiries. Evaluating responses
to inquiries is an integral part of the inquiry process.
Responses to inquiries may provide the auditor with information not previously possessed or with
corroborative audit evidence. Alternatively, responses might provide information that differs significantly
from other information that the auditor has obtained, for example, information regarding the possibility of
management override of controls. In some cases, responses to inquiries provide a basis for the auditor to
modify or perform additional audit procedures.
Although corroboration of evidence obtained through inquiry is often of particular importance, in the case of
inquiries about management intent, the information available to support management’s intent may be limited.
In these cases, understanding management’s past history of carrying out its stated intentions, management’s
stated reasons for choosing a particular course of action, and management’s ability to pursue a specific
course of action may provide relevant information to corroborate the evidence obtained through inquiry.
In respect of some matters, the auditor may consider it necessary to obtain written representations from
management and, where appropriate, those charged with governance to confirm responses to oral inquiries.
See ISA 580 for further guidance.
8.10.2 Inspection
Inspection involves examining records or documents, whether internal or external, in paper form, electronic
form, or other media, or a physical examination of an asset. Inspection of records and documents provides
audit evidence of varying degrees of reliability, depending on their nature and source and, in the case of
internal records and documents, on the effectiveness of the controls over their production. An example of
inspection used as a test of controls is inspection of records for evidence of authorization.
Some documents represent direct audit evidence of the existence of an asset, for example, a document
constituting a financial instrument such as a stock or bond. Inspection of such documents may not necessarily
provide audit evidence about ownership or value. In addition, inspecting an executed contract may provide
audit evidence relevant to the entity’s application of accounting policies, such as revenue recognition.
159
Inspection of tangible assets may provide reliable audit evidence with respect to their existence, but not
necessarily about the entity’s rights and obligations or the valuation of the assets. Inspection of individual
inventory items may accompany the observation of inventory counting.
8.10.3 Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be
performed manually or electronically.
8.10.4 Re-performance
Re-performance involves the auditor’s independent execution of procedures or controls that were originally
performed as part of the entity’s internal control.
8.10.5 Observation
Observation consists of looking at a process or procedure being performed by others, for example, the
auditor’s observation of inventory counting by the entity’s personnel, or of the performance of control
activities. Observation provides audit evidence about the performance of a process or procedure, but is
limited to the point in time at which the observation takes place, and by the fact that the act of being
observed may affect how the process or procedure is performed.
8.10.6 Analytical Procedures
Analytical procedures consist of evaluations of financial information through analysis of plausible relationships
among both financial and non-financial data. Analytical procedures also encompass such investigation as is
necessary of identified fluctuations or relationships that are inconsistent with other relevant information or
that differ from expected values by a significant amount.
8.10.7 External Confirmation
An external confirmation represents audit evidence obtained by the auditor as a direct written response to
the auditor from a third party (the confirming party), in paper form, or by electronic or other medium.
External confirmation procedures frequently are relevant when addressing assertions associated with certain
account balances and their elements. However, external confirmations need not be restricted to account
balances only. For example, the auditor may request confirmation of the terms of agreements or transactions
an entity has with third parties; the confirmation request may be designed to ask if any modifications have
been made to the agreement and, if so, what the relevant details are. External confirmation procedures also
are used to obtain audit evidence about the absence of certain conditions, for example, the absence of a “side
agreement” that may influence revenue recognition.
160
8.11 Overview of Audit Reports
True and fair view and Material and Pervasive Material Material and Pervasive
compliance with Financial
Reporting Framework
Unmodified audit report Opinion of disclaimer- Qualified Adverse opinion-

Scope limitation opinion Disagreement
8.11.1 Sections of Unmodified Audit Report
ISA 700 describes the elements that make up the audit report as:
Title
• The title should be ‘appropriate’. The use of ‘Independent Auditor’s Report’ distinguishes this report
from any other report produced internally or by other non-statutory auditors.
Addressee
• The report should be addressed to the intended user of the report which is usually the shareholders,
board of directors or other party defined in the engagement or local regulations.
• This varies from country to country, but is usually addressed to the members of the company. This is to
prevent other parties relying on the report when it is not intended for their use.
Introductory paragraph
Identifies the financial statements which have been audited (see below), by name or by the use of page
numbers, and stating the period they cover. This is in order to distinguish such information from other
documents that have not been subject to audit (e.g. the Directors’ Report).
161
Statement of responsibilities of management
• Preparation of the financial statements which show a true and fair view or present fairly in all
material respects and
• In accordance with the applicable financial framework.
• Designing and implementing an effective internal control system.
• Applying appropriate accounting policies
• Making reasonable accounting estimates.
Statement of responsibilities of the auditors
• Express opinion.
• Assess the risk of material misstatement.
• The fact that the audit was planned and performed to obtain reasonable assurance about whether
the financial statements are free from material misstatement.
162
8.11.2 Modified Audit Reports
8.11.2.1 Material and pervasive
• ISA 700 uses the phrase 'material and pervasive' and we know that unless the matter is material, it
will not cause the report to be qualified at all. (Although you should remember that materiality can be
about an item’s nature as well as its value.)
• So the nature of the qualification depends on the degree of effect that the auditor considers it may have
on the financial statements.
• To be considered pervasive, it must affect the view given by the financial statements as a whole. As such:
– if the circumstance is a limitation of scope it will leave the auditor unable to form an opinion at all.
– If it is a disagreement, it will be of such significance that the financial statements do not give a true
and fair view.
8.11. 2.2 Four types of qualified audit reports
Limitation of scope
• Except for.
• Disclaimer.
Disagreement
• Except for.
• Adverse.
163
8.12 Internal Control weakness letter
Auditors should communicate material weaknesses in internal control in writing to ‘those charged with
governance’ – the audit committee (if one exists) or management in general.
The form, timing and addressees of this communication should be agreed at the start of the audit, as part of
the terms of the engagement.
This report has traditionally been known as a management letter or report to management and is
usually sent at the end of the audit process.
Recent revision of audit standards has added other matters that should be communicated.
• A report on audit independence.
• A report at the planning stage, identifying key audit risks and the work to be performed.
• At the end of the audit, a report covering:
– expected audit report
– unadjusted errors and misstatements
– comments on accounting practices and policies in use by the company any
– other relevant matters.
However, this section of the Notes will concentrate on internal control issues.
8.12.1 Reporting on controls
Where the auditor is reporting weaknesses, it should be made clear that:
• the report is not a comprehensive list of weaknesses, but only those that have come to light during
normal audit procedures
• the report is for the sole use of the company
• no disclosure should be made to a third party the without written agreement of the auditor
• no responsibility is assumed to any other parties.
164
The usual structure of the report is:
• covering letter (which will include the above list of points)
• appendix, noting the weaknesses, consequences, and recommendations (often with a space left for
management to respond with their planned action).
165
8.13 Overview of USAID specific financial audits
Financial audits
U.S. based recipients Foreign recipients
Audit threshold Audit threshold

US $ 500,000 spent in fiscal US $ 300,000 spent in fiscal
year year
Agency contracted Recipient contracted Agency contracted Recipient contracted

audits audit audit audit
OMB Circular A-133 OIG Guidelines for Financial Audits contracted

by Foreign Recipients
166
8.14 Structure of OIG Guidelines for Financial Audits contracted by Foreign Recipient
STRUCTURE OF OIG GUIDELINES FOR FINANCIAL

AUDITS CONDUCTED BY FOREIGN RECIPIENT
Chapter 01: purpose of guidelines Chapter 06: example of fund accountability

statement, cost sharing schedule and schedule
of computation of indirect cost rate
Chapter 02: selection of independent

auditors
Chapter 07: illustrative reports
Chapter 03: audit objectives Chapter 08: illustrative statement of work for
recipient contracted audit
Chapter 04: audit scope Chapter 09: model audit agreement with
supreme audit institutions
Chapter 10: technical proposal for

qualification of public accounting firm
Chapter 05: audit reports
CHAPTER 11: USAID INSPECTOR GENERAL CONTACT INFORMATION
8.15 Purpose of OIG Guidelines for financial audits contracted by Foreign Recipients
Key Questions
8.15.1 WHO IS RESPONSIBLE TO MAKE CONTRACT WITH INDEPENDENT AUDITORS?
It is the grantee’s responsibility to contract independent auditors acceptable to USAID. USAID does reserve
the right to conduct audits using its own staff, despite acceptable audits being performed by other auditors, in
cases where special accountability needs are identified.
8.15.2 WHO MUST BE AUDITED UNDER OIG GUIDELINES?
167
1. An audit must be performed annually in accordance with these Guidelines when the Non-US recipient
expends $300,000 or more in USAID awards in its fiscal year.
2. SUB-RECIPIENTS - Non-U.S. recipients have to ensure that audits of sub-recipients are performed
annually, in accordance with these Guidelines, for sub-recipients expending $300,000 or more in USAID
awards in their fiscal year.
8.15.3 HOW SCENARIO OF MULTIPLE AGREEMENTS AND SUBRECIPIENTS MUST BE

DEALT?
A. If a non-U.S. organization is only a sub-recipient of a U.S. recipient organization then it is:
• Subject to monitoring by the prime U.S. recipient, which must comply with the requirements of paragraph
1.5 of OIG Guidelines for RCA.
B. If a foreign recipient receives direct USAID assistance and receives USAID funding as a sub-recipient of a
U.S. recipient organization, then:
• The annual audit must be performed in accordance with these Guidelines and must include the funding
passed through by the U.S. recipient organization; and
• If the foreign recipient also receives assistance from other donors, consideration should be given to
including the other donors' assistance in the USAID audit, provided an agreement and cost-sharing
arrangement can be negotiated with the other donors.
C. If a recipient receives direct funding from USAID under more than one agreement and also indirect
assistance from USAID as a sub-recipient from either foreign or U.S. recipients then:
• The recipient must have one annual recipient-contracted audit performed that would cover
all USAID funding to the recipient from all sources. The recipient should contract only one
audit firm to perform the annual audit.
D.Recipients must send their audit contracts for approval to the nearest USAID mission with which they
have an agreement. This USAID mission will act as the designated cognizant mission, unless the recipient is
otherwise directed by USAID.
The designated cognizant mission will coordinate the audit efforts with any other USAID missions that have
agreements with the recipient.
E. If a U.S. sub-recipient expends $500,000 or more in USAID awards in its fiscal year it is subject to Circular
A-133 audit requirements
8.15.4 WHAT ARE THE RESPONSIBILIITIES OF USAID MISSION AND OIG?
1. USAID mission monitor and ensure the submission of required recipient-contracted audit reports.
2. RIG monitors the quality of such audits.
3. RIG maintains a list of independent auditors eligible to perform audits of USAID agreements. The list of
eligible independent auditors is divided into regular and conditional
4. USAID mission ensure that the audit agreements between recipients and independent auditors contain a
standard statement of work containing all the requirements of these Guidelines. Accordingly, recipients must
168
send all prospective audit contracts to the USAID mission for approval prior to finalization and must indicate
which USAID agreements will be covered by the audit.
5. The USAID missions will provide the independent auditors with data regarding any USAID direct
procurements for use by the recipient and will confirm the amounts disbursed (advances and
reimbursements) to the recipient.
6. The cognizant USAID mission will be responsible for distributing audit reports to the other USAID
missions and resolving a recipient's organization-wide internal control and compliance deficiencies. Each
USAID mission will also be responsible for acting upon findings and recommendations applicable to its
agreements with the recipient.
7. RIG will conduct quality control reviews of the audit documentation for a selected sample of audits. These
reviews will determine whether audit work was performed in accordance with these guidelines. The RIG will
notify USAID, recipient and independent auditors of the results of these reviews.
8.15.5 WHO WILL BEAR AUDIT COST?
A. Recipients may charge to the USAID agreements all costs for performing the specific audit of their
USAID-funded programs.
B. The costs to be charged to the USAID agreements for auditing the recipient's general purpose financial
statements will be a matter for negotiation between USAID and the recipient
C. No audit costs may be charged to a USAID agreement if audits are not performed in accordance with
these Guidelines, it is incumbent upon the auditor to produce a final product that meets this requirement.
D. USAID will consider appropriate sanctions against a recipient in the event of their continued inability or
unwillingness to have an audit performed in accordance with these Guidelines, these may include:
D.1. Suspension of disbursements to the recipient until a satisfactory audit is performed
D.2. USAID will refer independent auditors to appropriate regulators, professional authorities, and U.S.-
affiliated firms for significant inadequacies or repeated instances of substandard performance
D.3. Auditors submitting unacceptable work may be removed from USAID’s approved list of firms
8.16 Selection of Independent Auditors
Key Questions
8.16.1 WHAT ARE THE KEY SELECTION CONSIDERATIONS FOR AUDIT FIRM?
The recipient can select audit firm from the list of eligible audit firms maintained by the cognizant RIG. The
selection of audit firms is based on following factors.
 Past performance
 Independence from organization
 Experience and credentials of audit engagement team
 Cost
 Reference checks
8.16.2 IS IT POSSIBLE FOR NGO MANAGEMENT TO APPOINT LOCAL AUDIT FIRM?
169
Local firms may be conditionally accepted when they are the regular auditors of a recipient's general purpose
financial statements and are recommended by the USAID mission. The recommendation may be based on
prior experience, other acceptable client assurance or a pre-qualification review by USAID. Conditionally
accepted firms must be separately approved for each recipient they audit under these Guidelines. In
determining acceptability of proposed audit firms, USAID gives first priority to firms that have partnership
agreements with firms located in the United States. Audit firms who have authority to use the letterhead and
sign audit reports in the name of a U.S. audit firm are required to do so. USAID will give second priority to
affiliates or representatives of firms located in the United States that are subject to standard audit quality
control procedures and reviews. Local firms that are not affiliated with firms located in the United States may
be accepted when there is a high degree of assurance of professional quality based upon prior experience
with an international organization or other acceptable client assurance.
8.16.3 WHAT ARE THE PRIOR APPROVAL REQUIREMENTS OF USAID REGARIDNG THE
SELECTION PROCESS OF AUDIT FIRM?
The USAID mission must approve the audit firm prior to execution of the audit services contract and hence
the preferred procedure is for the recipient to:
A. Select audit firms from the list of firms determined to be eligible by USAID and obtain proposals.
B. Submit a draft contract to the USAID for approval
C. USAID will verify that the firm selected is on the list of firms eligible to perform audits of USAID funds
and that the statement of work contained in the contract complies with these Guidelines (USAID has the
authority to establish a limit on the maximum number of years that a recipient can be audited by the same
audit firm).
D. It is the responsibility of the contracted audit firms to perform audits pursuant to these Guidelines and to
present audit reports in a timely manner.
E. If USAID rejects the work of an audit firm due to noncompliance with these Guidelines, the audit costs may
not be charged to the USAID agreements until such time as USAID finds the report to be acceptable. If audit
firm fail to make its report acceptable, either a different recipient contracted audit firm or the Regional
Inspector General (RIG) must perform another audit.
8.16.4 WHAT ARE THE SUBMISSION DEADLINES FOR AUDIT REPORT?
Six (6) copies of the audit report in English and one copy of the report in the recipient country's official
language (if considered appropriate) must be submitted to USAID within 30 days after completion of the
audit. The audit shall be completed and submitted to USAID no later than nine (9) months after the
end of the recipients year end. Alternatively, electronic copies of the audit report can be submitted to USAID
if requested.
8.17 AUDIT OBJECTIVES
KEY QUESTIONS
8.17.1 WHAT KIND OF FINANCIAL INFORMATION AND SYSTEMS MUST BE AUDITED?
A. The financial audit must include a specific audit of all the recipient’s USAID-funded programs. The fund
accountability statement is the basic financial statement to be audited that presents the recipient's
170
revenues, costs incurred, cash balance of funds provided to the recipient by USAID, and commodities and
technical assistance directly procured by USAID for the recipient's use. The fund accountability statement
should be reconciled to the USAID funds included in the general purpose financial statements by a note to
the financial statements or the fund accountability statement.
B The cost share schedule must be reviewed (if applicable)
C. The auditors must review and evaluate the recipient's internal control related to USAID programs to
obtain a sufficient understanding of the design of relevant control policies and procedures and whether those
policies and procedures have been placed in operation (Auditors Report on Internal Controls).
D. Determine whether the recipient complied in all material respects with agreement terms and laws
and regulations related to the USAID funded program (Auditors Report on Compliance).
E. Perform an audit of the indirect cost rate(s) if the recipient has been authorized to charge indirect
costs to USAID using provisional rates and USAID has not yet negotiated final rates with the recipient.
F. The financial audit should also include an audit of the recipient’s general purpose financial statements on an
organization-wide basis (balance sheet, income statement, and cash flow statement) if the recipient has
been authorized to charge indirect costs, or if the mission specifically requests such an audit.
8.17.2 WHAT IS THE REPORTING CURRENCY OF FUND ACCOUNTABILITY

STATEMENT?
All currency amounts in the fund accountability statement, cost-sharing schedule, and the report findings, if
any, must be stated in US$. The auditors should indicate the exchange rate(s) used in the notes to the fund
accountability statement.
8.18 AUDIT SCOPE
KEY QUESTIONS
8.18.1 WHAT ARE THE PRE-AUDIT REVIEW DOCUMENTS?
1. The agreements between USAID and the recipient

2. The sub-agreements between the recipient and other implementing entities, as applicable.
3. Contracts and subcontracts with third parties, if any.
4. The budgets, implementation letters, and written procedures approved by USAID.
5. USAID Automated Directives System Chapter 636—“Program Funded Advances.”
6. OMB Circular A-122—"Cost Principles for Nonprofit Organizations."
7. OMB Circular A-21—"Cost Principles for Educational Institutions."
8. Federal Acquisition Regulation (FAR), Part 31—“Contract Cost Principles and Procedures.”
9. USAID Acquisition Regulation (AIDAR), which supplements the FAR.
10. Mandatory Standard Provisions for Non-U.S. Nongovernmental Grantees (USAID
Automated Directives System, Series 300).
11. Standard Provisions Annex for Agreements with Foreign Governments (USAID
Automated Directives System, Series 200).
12. All program financial and progress reports; charts of accounts; organizational charts; accounting systems
descriptions; procurement policies and procedures; and receipt, warehousing and distribution procedures for
materials, as necessary, to successfully complete the required work.
171
8.18.2 HOW THE FUND ACCOUNTABILITY STATEMENT SHOULD BE VERIFIED BY

AUDIT FIRM AS PER OIG GUIDELINES?
The auditor must:
8.18.2.1. Perform the audit in accordance with U.S. Government Auditing Standards
8.18.2.2. Express an opinion on the fund accountability statement for the USAID-funded programs
8.18.2.3. Determine if the recipient has taken adequate corrective action on prior audit report
recommendations.
8.18.2.4. Provide reasonable assurance of detecting situations or transactions in which fraud or illegal acts
have occurred or are likely to have occurred as a result of inadequate internal controls. If such evidence
exists, the auditors must contact USAID and should exercise due professional care in pursuing indications of
possible fraud and illegal acts so as not to interfere with potential future investigations or legal proceedings.
8.18.2.5. Examine the fund accountability statement for USAID programs including:
a. The budgeted amounts by category and major items

b. The revenues received from USAID for the period covered by the audit
c. The costs reported by the recipient as incurred during that period; and
d. The commodities and technical assistance directly procured by USAID for the recipient's use.
8.18.2.6. Include all USAID funds identified by each specific program or agreement and separately identify
those revenues and costs applicable to each specific USAID agreement.
8.18.2.7. Not include cost-sharing contributions provided from the recipient's own funds or in-kind as a
separate cost-sharing schedule must be included and reviewed.
8.18.2.8. Review direct and indirect costs billed to and reimbursed and pending reimbursement by USAID
8.18.2.9. Determine whether specific costs incurred are allowable, allocable, and reasonable under the
agreement terms, including (but not limited to):
a. Review direct salary charges to determine if reasonable for that position, in accordance with those
approved by USAID when USAID approval is required, and supported by appropriate payroll records.
b. Determine if overtime was charged to the program and whether it was allowable under the terms of the
agreements.
c. Determine whether allowances and fringe benefits received by employees were in accordance with the
agreements and applicable laws and regulations.
d. Review travel and transportation charges to determine whether they were adequately supported and
approved.
e. Review commodities (such as supplies, materials, vehicles, equipment, food products, tools, etc.), whether
procured by the recipient or directly procured by USAID for the recipient's use.
172
f. Review technical assistance and services, whether procured by the recipient or directly procured by USAID
for the recipient's use. The auditors should determine if used for their intended purposes in accordance with
the terms of the agreements. The cost of technical assistance and services not properly used in accordance
with terms of the agreements must be questioned in the fund accountability statement.
8.18.2.10. Identify and quantify any questioned costs. All material questioned costs resulting from instances of
noncompliance with agreement terms and applicable laws and regulations must be included as findings in the
report on compliance. Also, the notes to the fund accountability statement must briefly describe both
material and immaterial questioned costs and must be cross-referenced to any corresponding findings in the
report on compliance. Questioned costs must be presented in the fund accountability statement in two
separate categories:
a. Ineligible costs – these are costs that are unreasonable; prohibited by the agreements or applicable laws
and regulations; or not program related; and
b. Unsupported costs - these are costs not supported with adequate documentation or did not have required
prior approvals or authorizations.
8.18.2.11. Review general and program ledgers
8.18.2.12. Review the procedures used to control the funds and review the bank accounts and the controls
on those bank accounts. Perform positive confirmation of balances, as necessary.
8.18.2.13. Ensure that all funds received by the recipient from USAID are appropriately recorded in the
recipient's accounting records and that those records were periodically reconciled with information provided
by USAID.
8.18.2.14. Review procurement procedures to determine whether sound commercial practices including
competition were used, reasonable prices were obtained, and adequate controls were in place over the
qualities and quantities received.
8.18.2.15. On closeout audits the auditor must:
a. Review un-liquidated advances to the recipient and pending reimbursements by USAID
b. Ensure that the recipient returned any excess cash to USAID
c. Ensure that all assets (inventories, fixed assets, commodities, etc.) procured with program funds were
disposed of in accordance with the terms of the agreements. The auditors should present, as an annex to the
fund accountability statement, the balances and details of final inventories of nonexpendable property
acquired under the agreements. This inventory should indicate which items were titled to the U.S.
Government and which were titled to other entities.
8.18.2.16. Determine whether program income (if applicable) was added to funds used to further eligible
project or program objectives, to finance the non-federal share of the project or program, or deducted from
program costs, in accordance with USAID regulations, other implementing guidance, or the terms and
conditions of the award.
8.18.2.17. Review the allocation method to determine that the indirect cost pool and distribution base
include only allowable items in accordance with agreement terms and regulations when indirect costs were
charged to USAID using provisional rates. The auditors should be aware that costs that are unallowable as
173
direct charges to USAID agreements (e.g., fundraising) must be allocated their share of indirect costs if they
represent activities that (1) include the salaries of personnel, (2) occupy space, and (3) benefit from the
organization’s indirect costs. Indirect cost rates must be calculated after all adjustments have been made to
the pool and base.
8..18.2.18. While the auditors may prepare or assist the recipient in preparing the fund accountability
statement from the books and records maintained by the recipient, but the recipient must accept
responsibility for the statement's accuracy before the audit commences.
8.18.3 HOW THE COST SHARING SCHEDULE SHOULD BE CHECKED BY AUDIT FIRM AS
PER THE OIG GUIDELINES?
USAID agreements may require cost-sharing contributions by the recipient. Most agreements establish a life-
of-project budget for such contributions; however, some agreements may establish annual budgets for those
contributions. The review of the costs sharing schedule must be approached differently depending on
whether the cost-sharing budget is a life-of project budget or an annual budget (please see guidelines for
detailed account for both cost shares). In either case, the review consists principally of inquiries of recipient
personnel and analytical procedures applied to financial data supporting the cost-sharing schedule. And in
essence the audit should:
8.18.3.1. Determine whether cost-sharing contributions were provided and accounted for by the recipient in
accordance with the terms of the agreements.
8.18.3.2. Clearly state whether or not cost-sharing contributions were required by the agreement.
8.18.3.3. Review the cost-sharing schedule to determine if the schedule is fairly presented in accordance with
the basis of accounting used by the recipient to prepare the schedule.
8.18.3.4. Question all cost-sharing contributions that are either ineligible or unsupported costs.
a. All questioned costs must be briefly described in the notes to the cost-sharing schedule. Notes to the cost-
sharing schedule must be cross-referenced to the corresponding findings in the report on compliance
b. Material questioned costs must be included as findings in the report on compliance.
c. Reportable internal control weaknesses related to cost-sharing contributions must be set forth as findings
in the report on internal control.
8.18.3.5. For close out audits of awards with life-of-project Cost Share Budgets, and audits of awards with
Annual Cost Share Budgets, the cost-sharing schedule must identify the budgeted amounts required by the
agreements, the amounts actually provided, and any cost-sharing shortfalls
8.18.3.6. State that the review was conducted in accordance with AICPA standards, and it should also explain
that a review is more limited in scope than an examination performed in accordance with AICPA standards,
and hence an opinion on the schedule is not expressed.
8.18.3.7. While the auditors may prepare or assist the recipient in preparing the cost-sharing schedule from
the books and records maintained by the recipient. The recipient must, however, accept responsibility for the
schedule's accuracy before the review commences
8.18.4 HOW INTERNAL CONTROLS OF RECIPIENTS MUST BE TESTED BY AUDITORS?
174
8.18.4.1 The auditors must review and evaluate the recipient's internal control related to USAID funded
programs and any cost-sharing contributions (if required) to obtain a sufficient understanding of the design of
relevant control policies and procedures and whether those policies and procedures have been placed in
operation. This will include but not limited to:
a. Ensuring charges to the program are proper and supported
b. Managing cash on hand and in the bank account
c. Procuring goods and services
d. Managing inventory
e. Managing personnel
f. Managing and disposing of commodities purchased
g. Ensuring compliance with agreement terms and applicable laws and regulations
8.18.4.2. The auditor's report on internal controls must include as a minimum:
a. The scope of the auditor's work in obtaining an understanding of internal control and in assessing risk, and;
b. Identifying the reportable conditions including identifying material weaknesses in the internal controls.
Reportable conditions, including material weaknesses, must be described in the report on internal control as
findings while Non reportable conditions should be included in a separate management letter to the recipient.
8.18.5 HOW AUDITORS ENSURE COMPLIANCE WITH AWARD TERMS, LAWS AND
REGULATIONS?
8.18.5.1. The auditor must ensure that the recipient complied (in all material respects) with the agreement
(including cost sharing, if applicable) and applicable laws and regulations. All material instances of Non-
compliance and all illegal acts that have occurred or are likely to have occurred should be identified as
findings in the report on compliance while nonmaterial instances of noncompliance should be communicated
to the recipient in a separate management letter that should be sent with the audit report Also, the notes to
the fund accountability statement that describe both material and immaterial questioned costs must be cross
referenced to any corresponding findings in the report on compliance.
8.18.5.2. In planning and conducting the tests of compliance the auditors must amongst others:
a. Identify the agreement terms and pertinent laws and regulations that if not observed could have material
effect on fund accountability statement
b. Determine if payments have been made in accordance with agreement terms and applicable laws and
regulations.
c. Determine if funds have been expended for purposes not authorized. If so, the auditors must question
these costs in the fund accountability statement.
d. Identify any costs not considered appropriate, classifying and explaining why these costs are questioned.
175
e. Determine whether commodities, whether procured by the recipient or directly procured by USAID for
the recipient's use, exist or were used for their intended purposes in accordance with the terms of the
agreements. If not, the cost of such commodities must be questioned.
f. Determine whether any technical assistance and services, whether procured by the recipient or directly
procured by USAID for the recipient's use, were used for their intended purposes in accordance with the
agreements. If not, the cost of such technical assistance and services should be questioned.
g. Determine if the amount of cost-sharing funds was calculated and accounted for as required by the
agreements or applicable cost principles, quantify any shortfalls.
h. Determine whether those who received services and benefits were eligible to receive them.
i. Determine whether the recipient’s financial reports (including those on the status of cost sharing
contributions) and claims for advances and reimbursement contain information that is supported by the
books and records.
j. Determine whether the recipient held advances of USAID funds in interest-bearing accounts, and whether
the recipient remitted to USAID any interest earned on those advances, with the exception of up to $250 a
year that the recipient may retain for administrative expenses.
8.18.6 WHAT IS THE STANDARD FORMAT OF INTERNAL CONTROLS AND

COMPLIANCE REPORTS?
The “findings” contained in the reports on internal control and compliance related to USAID-funded
programs must include:
8.18.6.1. A description of the condition (what it is) and
8.18.6.2. The criteria (what should it be)
8.18.6.3. The cause (why it happened) and
8.18.6.4. The effect (what harm was caused by not complying with the criteria)
8.18.6.5. In addition, the findings must contain a recommendation that corrects the cause and the condition,
as applicable. It is recognized that material internal control weaknesses and noncompliance found by the
auditors might not always have all of these elements fully developed. The auditors must, however, at least
identify the condition, criteria and possible effect to enable management to determine the effect and cause.
This will help management take timely and proper corrective action.
8.18.6.6. Findings that involve monetary effect must:
a. Be quantified and included as questioned costs in the fund accountability statement, the
Auditor’s Report on Compliance, and cost-sharing schedule (cross-referenced).
b. Be reported without regard to whether the conditions giving rise to them were corrected.
c. Be reported whether the recipient does or does not agree with the findings or questioned costs.
176
d. Contain enough relevant information to expedite the audit resolution process (e.g., number of items
tested, size of the universe, error rate, corresponding U.S. dollar amounts, etc.).
8.18.6.7. Also, after each recommendation, pertinent views of responsible recipient officials concerning the
auditor's findings and actions taken by the recipient to implement the recommendations should be obtained if
possible in writing. When the auditors disagree with management comments opposing the findings,
conclusions or recommendations, they must explain their reasons for this. Conversely, the auditors should
modify their report if they find the comments valid.
8.18.6.8. Any evidence of fraud or illegal acts that have occurred or are likely to have occurred must be
included in a separate written report if deemed necessary by USAID. This report must include an
identification of all questioned costs as a result of fraud or illegal acts, without regard to whether the
conditions giving rise to the questioned costs have been corrected or whether the recipient does
or does not agree with the findings and questioned costs. In reporting material fraud, illegal acts, or other
noncompliance, the auditors must place their findings in proper perspective. To give the reader a basis for
judging the prevalence and consequences of these conditions, the instances identified should be related to the
universe or the number of cases examined and is quantified in terms of U.S dollar value, if appropriate.
8.18.7 HOW THE SCHEDULE OF COMPUATATION OF INDIRECT COST RATE (if

applicable) SHOULD BE VERIFIED?
The auditor should prepare a schedule of computation of indirect cost rate (see
Example 6.3 of these Guidelines) and the auditors report on the schedule of computation of indirect cost rates
which is a separate report (see Example 7.4 of these Guideline). Auditors should determine the actual indirect
cost rates for the year if the recipient has used provisional rates to charge indirect costs to USAID.
The audit of the indirect cost rates should include tests to determine whether the:
a. Distribution or allocation base includes all costs that benefited from indirect activities.
b. Distribution or allocation base is in compliance with the governing USAID Negotiated Indirect Cost Rate
Agreement, if applicable.
c. Indirect cost pool includes only costs authorized by the USAID agreements and applicable cost principles.
d. Indirect cost rates obtained by dividing the indirect cost pool by the base are accurately calculated.
e. Costs included in this calculation reconcile with the total expenses shown in the recipient's audited general
purpose financial statements.
f. The results of the audit of the indirect cost rate should be presented in a schedule of computation of
indirect cost rate (see Example 6.3 of these Guidelines). This schedule should contain:
i. A listing of costs included in each indirect cost pool

ii. The distribution base, and
iii. The resultant indirect cost rate calculation. The costs in the schedule should reconcile with the
total expenses shown in the recipient's general purpose financial statements.
U.S. Office of Management and Budget (OMB) Circular A-122 provides additional guidance on allocation of
indirect costs and determination of indirect cost rates.
8.18.8 WHAT ARE SOME OF THE OTHER AUDIT RESPONSIBILITIES?
177
The auditors must perform the following steps:
8.18.8.1. Hold entrance and exit conferences with the recipient. USAID should be notified of these
conferences in order that USAID representatives may attend, if deemed necessary.
8.18.8.2. During the planning stages of an audit, communicate information to the auditee regarding the nature
and extent of the planned testing and reporting on compliance with laws and regulations and internal control
over financial reporting. Such communication should state that the auditors do not plan to provide opinions
on compliance with laws and regulations and internal control over financial reporting. Written
communication is preferred.
8.18.8.3. Institute quality control procedures to ensure a reasonable basis for an opinion regarding the
financial statements under audit. While auditors may use their standard procedures for ensuring quality
control, those procedures must, at a minimum, ensure that:
a. Audit reports and supporting working papers are reviewed by an auditor, preferably at the partner level,
who was not involved in the audit. This review must be documented.
b. All quantities and monetary amounts involving calculations are footed and cross-footed.
c. All factual statements, numbers, conclusions and monetary amounts are cross-indexed to supporting
working papers.
8.18.8.4. Determine whether the recipient ensured that audits of its sub-recipients were performed to
ensure accountability for USAID funds passed through to sub-recipients (see paragraph 1.6 of the Guidelines). If
sub-recipient audit requirements were not met, the auditors should disclose this in the fund accountability
statement and consider qualifying their opinion.
8.18.8.5. Obtain a management representation letter signed by the recipient’s management.
178
8.19 Audit Reports as per OIG Guidelines for financial audits contracted by foreign recipient
Types of Reports
Auditors report on Auditors report on general

Fund Accountability purpose financial statement
Statement
Auditors report on Auditors report on Auditors report on Auditors report on

internal controls compliance schedule of cost sharing
computation of
indirect cost rate
Reference material
 ADS 590
 ADS 591
 Guidelines for Financial Audits contracted by Foreign Recipients
179
OFT MANUAL: FM Project Closeouts SECTION – 8
Award Closeout
9.1 Definition
“Award of award
Close-Out” refersclose-out
to all of the activities that the USG requires grantees to do at the end of their
award period:
• Program related activities
• Human resource related activities
• Financial management-related activities
• Administrative activities
9.2 USG and Agency Regulations for award close-outs
U.S. based NGOs Foreign NGOs
Overall close-out procedures 22 CFR 226.71
Program Performance 22 CFR 226.51 Terms of award
Financial Reporting 22 CFR 226.52
Record, extension and access 22 CFR 226.53

OIG Guidelines for Financial Audits
Audit 22 CFR 226.26 contracted by Foreign Recipients
OMB Circular A 133
9.3 Programmatic issues at award close-outs
9.3 .1 Exit strategies
Phasing down: gradual reduction of program activities
9.3 .2 Final Completion Report
The final performance report is somewhat similar to the Quarterly Performance Report, though it covers the
entire award period. Your COTR may give you a specific outline or template to follow. At a minimum, your
final performance report will include final outcomes, lessons learned, and conclusions.
Be sure to submit the report to your COTR and the Development Experience Clearinghouse (DEC)
(http://dec.usaid.gov) within 90 days of the end of the award. Many organizations choose to take the final
performance report one step further and create something long-lasting that they can share with beneficiaries,
the community, sub-recipients, and other NGOs.
180
This allows an organization to highlight its successes and document its lessons learned and contribute to the
ongoing effort to improve interventions in that focus area. Your organization’s experiences may even help
other communities struggling with the same challenges. Some organizations share this document with Web-
based communities of practice, within their NGO network, or at regional and international conferences, or
they submit it to relevant publications.
To create this report, you will want to develop a separate document from the one you provided to USAID,
but you will still need to credit USAID, the same way you would on other project-related public
communication products
An end-of-project evaluation that objectively documents the impact of your project and provides an
independent analysis of your project’s success will greatly enhance the quality of this report.
Checklist for Final Completion Report
• Project name and number
• Brief description of the project
• Partners
• Goals and OBJECTIVES
• A comparison of actual accomplishments with the goals and objectives established for the grant period
• Reasons why objectives were not met
• The output and outcomes of project
• Success stories
• Lessons learn
• When appropriate, analysis and explanation of cost overruns or high unit costs
• Continuation of the project
• Evaluation findings (if evaluation done)
9.3 .3 Project Evaluation
• Costs versus budget
• Organizational outcomes achieved versus planned outcomes; any unplanned outcomes
• Effectiveness of project planning
• Effectiveness of project implementation
• Team’s compilation of project documents, evaluations and lessons learned
Identification of best practice 181

9.3 .4 Archive program activities
• Semi-annual and annual reports
• Master/original work plan
• Monitoring and evaluation plan
• Performance monitoring reports
• Evaluation reports
• Success stories and newspaper articles
• Conference , FGDs, Seminar and Training of Trainers workshop reports
• Manuals, publications
• Consultant reports
9.3.5: USAID Specific Regulations for Program close-outs
Reference material: 22 CFR 226.51
§ 226.51 Monitoring and reporting program performance.
a) Recipients are responsible for managing and monitoring each project, program, sub award, function or
activity supported by the award. Recipients shall monitor sub awards to ensure sub-recipients have met the
audit requirements as delineated in Section 226.26.
(b) The terms and conditions of the agreement will prescribe the frequency with which the performance
reports shall be submitted. Except as provided in paragraph 226.51(f), performance reports will not be
required more frequently than quarterly or, less frequently than annually. Annual reports shall be due 90
calendar days after the award year; quarterly or semi-annual reports shall be due 30 days after the reporting
period. USAID may require annual reports before the anniversary dates of multiple year awards in lieu of
these requirements. The final performance reports are due 90 calendar days after the expiration or
termination of the award.
c) If inappropriate, a final technical or performance report shall not be required after completion of the
project.
(d) Performance reports shall generally contain, for each award, brief information on each of the following:
(1) A comparison of actual accomplishments with the goals and objectives established for the period, the
findings of the investigator, or both. Whenever appropriate and the output of programs or projects can be
readily quantified, such quantitative data should be related to cost data for computation of unit costs.
(2) Reasons why established goals were not met, if appropriate.
182
(3) Other pertinent information including, when appropriate, analysis and explanation of cost overruns or
high unit costs.
(e) Recipients shall submit the original and two copies of performance reports.
(f) Recipients shall immediately notify USAID of developments that have a significant impact on the award-
supported activities. Also, notification shall be given in the case of problems, delays, or adverse conditions
which materially impair the ability to meet the objectives of the award. This notification shall include a
statement of the action taken or contemplated, and any assistance needed to resolve the situation.
(g) USAID may make site visits, as needed.
(h) USAID shall comply with clearance requirements of 5 CFR 1320 when requesting performance data from
recipients
9.4 Human Resource Close Out
Close out can be a stressful time when managers are trying to maintain a balance between meeting
contractual obligations and considering the individual needs of staff. Historically, the focus in close out has
been on fulfilling contractual obligations. However, this may be perceived as insensitivity to staff who are
concerned about their future, particularly as the project ends. Communication is key to sustaining a high level
of performance.
All staff should be informed of the close-out process and the HR close-out plan, including a clear indication of
any efforts to retain staff. When you address personnel issues fairly, your organization is seen as a good
employer, so that when there is a new project, former employees, even if they cannot be retained now, will
be keen to rejoin. If you do not handle personnel issues well, there is the risk of complaints, low morale, lack
of concentration, and poor performance.
9.4.1 Reassignment options
 Where possible, try to retain employees by reassigning them to other projects.

 Focus on staff with strong skills and competencies that drive performance.
 If opportunities exist, consider promoting staff to more senior positions.
 Reassignment should be to further mission and based on clear criteria
9.4 .2 Best Practices Human Resource Close Out
• Clear and consistent communication about the change process
• Staff training on CV writing, financial management and counseling on stress
• Timely notification of termination/reassignment
• HR
9.4.3 Legal Requirements
Information and Contractual Obligations
on final payments
The•organization
Recommendation letters
must follow the termination laws of the country ensuring payment of severance and other
benefits as delineated by law.
• Managing expectations
• Recognition of performance and commitment

183
Staff have a right to receive a certificate of service. This can be as basic as providing name of employer, staff
name, date of commencement of work, date of termination, and location of work. Within the rules pertaining
to the country of employment, staff need to receive their final salary, payment of any outstanding expense
claims, outstanding leave days not taken, service/loyalty or severance payments, and other payments
mandated by your organization.
Additionally, staff needs to be able to transfer their pension contributions. Where staff are eligible for
repatriation, all the costs need to be incurred prior to the project completion date, with shipping costs being
agreed before the end date.
9.4.4 Team and Interpersonal Dynamics
• Low morale due to departing employees
• Focus on finding next job
• Competition for open positions within organization and at other organization
• Need to recognize and celebrate team (party, gifts)s
• Succession planning and handover
• Some employees will resign before the end of project for other opportunities
• Consider offering retention bonuses (if allowable and funding permits)
• Challenge to manage gaps in staffing –consider consultants, reassigning people, HQ support.
9.4.5 Terminal Payments
 . Final payment calculation should take into account the following:
 Outstanding work-related expense claims
 Un-reconciled advances (travel, educational benefits, medical, etc.)
 Final month salary
 Post employment benefits if applicable
9.5 Financial Close Out
Twelve months before the end of the award, your organization’s Program Manager must develop a work plan
and budget for the project’s final year that includes costs for all close out–related activities. Not only is this a
requirement, but it also will make the close-out process easier for you.
184
There are several key components to financial close out, including finalizing total expenditures, preparing a
final financial report, and maintaining documentation. Before you can complete these steps, however, you
must finalize all billing related to the award, including all final payments to sub-recipients. Once you complete
this process and complete a final SF-270 or SF-1034, you can finalize your total expenditures and prepare
your closing financial report.
9.5.1 Final Request for Funds
As your award end date approaches, start thinking about your final request for funds. Three months before
the end of the award, you should submit the final Standard Form-270 (SF-270) Request for Advance or
Reimbursement or the final Standard Form-1034 (SF-1034), according to the arrangements laid out by the
Financial Management Office (FMO). In addition, some agreements may require a final.
SF-425 within 90 days of the award end date. If your organization is not operating on a quarterly advanced-
funding basis, review the SF-270 and SF-1034 deadlines.
At this time, it is also best to keep a close eye on remaining award funds and outstanding costs. If your
accounting system is cash-based, rather than accrual-based, set up a special spreadsheet to track funds during
the last three months of your award.
9.5.2 Finalizing Total Expenditures
The first step in financial close out is to finalize total expenditures. This process helps to determine whether
any funds are remaining and to make sure your organization has contributed the total minimum required cost
share. As you will recall from chapter 4, award funding is obligated in stages and then disbursed to your
organization through advances or reimbursements. Determine your totals for the following categories:
 Total USAID-Award Amount—This is the ceiling or total estimated cost of your award (not
including any cost share).
 Total Obligations—The sum of all USAID funds obligated to you under this award.
 Total Disbursements—The total amount you actually received from your funding agency under
this award (that is, the amount of funds transferred to your organization’s bank account through the
SF-270 or SF-1034 requests). Be sure to include all final disbursements.
 Total Expenditures—The total amount you spent on the award.
 Total Expenditures Charged to USAID—A total of all expenditures that you charged to
USAID under this award. This excludes costs covered by cost share or other donor contributions.
 Total Cost-Share Requirement (if any)— This is the amount included in your original
agreement budget.
 Total Cost-Share Contribution—The sum of in-kind and cash contributions contributed toward
the award.
9.5.3 Remaining Funds
This section uses several example calculations based on the sample data.
Sample Data on Remaining Award Funds
185
 Total Obligations US$3,400,000

 Total Disbursements US$3,200,000
 Total Expenditures US$3,989,100
 Total Expenditures Charged to USAID US$3,089,100
 Total Cost-Share Requirement US$1,000,000
 Total Cost-Share Contribution US$ 900,000
There are three important categories of remaining funds to calculate:
 Unobligated funds;
 Remaining obligation; and
 Unspent advanced funds.
The first two categories are funds you may still be eligible to receive before the end of the award. The third
category is unspent funds that you will have to return to USAID unless you receive a non-funded extension
or other modification that allows you to spend the funds.
Toward the end of your award, it is important to determine what funds, if any, remain that you have not
disbursed. These include both unobligated and obligated funds.
Unobligated Funds
Unobligated funds are the difference between funds that have been obligated and the total award amount.
This amount is calculated as follows
Total USAID Award – Total Obligation =Unobligated Funds
Example: US$3,500,000 – US$3,400,000 =US$100,000
USAID has no obligation to disburse any funds it has not obligated. These funds are made available to you
based on the availability of funds and continued need for program activities. If you make any expenditures
above the obligated amount, you do so at your own risk.
186
Remaining Obligation
A remaining obligation is any amount of obligated funds that have not been disbursed. This amount is
calculated as follows:
Total Obligation – Total Disbursements = Remaining Obligation
Example: US$3,400,000 – US$3,200,000 = US$200,000
It is critical that you track this amount, especially in the final months of your award. If you need to complete
any final award activities before the end of the award, you can draw on your remaining obligation to cover
these costs. It also may be possible for your organization to receive a non-funded extension to continue your
program if part of your obligation is remaining.
Unspent Advanced Funds
The final category of remaining funds is money advanced to you that you have not spent. This amount is
calculated as follows:
Total Disbursements – Total Expenditures (USAID Share) = Unspent Advanced Funds Example:
US$3,200,000 – US$3,089,100 = US$120,900
If your organization has been advanced funds that you have not spent by the time the award ends, then you
must return those remaining funds. When calculating this, be sure to list all final expenditures, including all
final invoices and expenses from contractors, suppliers, and sub-recipients.
9.5.4 Meeting Your Cost- Share Requirement
If your organization committed to contributing a cost-share amount to the award, then you must account for
and document it. The calculation to ensure you have met the cost-share requirement is:
Cost-Share Requirement – Total Cost-Share Contribution = Cost-Share Balance
Example: US$1,000,000 – US$900,000 = US$100,000
In this example, the organization committed US$1 million in cost share, but only contributed US$900,000
during the life of the award. This leaves a US$100,000 cost-share balance. As your organization is
contractually obligated to meet your cost-share requirement, you will be required either to reimburse
USAID for the balance or have the amount deducted from any final reimbursement request.
187
9.5.5 Final Federal Financial Report (SF-425)
Your final Federal Financial Report is due 90 days after the award end date and may be subject to NICRA
adjustments based on your own or a USAID audit. The report includes the final quarter of activity, all final
transactions and expenditures, and the cumulative totals for your entire award. This report is submitted using
the Standard Form (SF)-425—the same form used to submit your quarterly financial reports.
9.5.6 Final Foreign Tax Reporting
In the 90 days following the end of the award, you are required to submit a final Foreign Tax (VAT) Report
to the office listed in your Agreement under the Reporting of Foreign Taxes standard clause. The VAT
report should cover all taxes your organization paid and for which the host government reimbursed you
since the last tax reporting cycle through the end of your award. If you receive reimbursements later, you
must submit these funds to USAID.
9.5.7 Final Audit
One fiscal year after the end of the award, conduct a final audit covering the last year of your award. You
may conduct this simultaneously with the end of your organization’s fiscal year and submit it as you would
other audits in accordance with the terms of your agreement.
9.6 Administrative Close Out
Administrative close out consists of completing nonfinancial tasks that may have financial implications. You
must:
 Ensure compliance with USAID standards on the types of documents that need to be retained.
(Remember, you must be able to provide documents should USAID request them.)
 Close bank account set up specifically for this program when it is no longer needed.
 Terminate leases (if appropriate) on rented office space that you do not plan to use after the award.
 Terminate supply contracts (including office supplies, leases).
 Terminate utilities (including electricity, water, gas, phone, Internet, fuel).
 Terminate other service providers (including mobile phones, security, insurance, storage contracts,
shipping, cleaning, banks).
 Obtain a receipt from each vendor indicating its acceptance of the notice of termination
 Maintain the office work environment as long as allowable.
 Settle any obligations related to closing your office or other program facilities. For example, if you
shared the office with other programs and had agreements in place covering shared office costs, be
sure to cancel these agreements and inform the remaining occupants of your intention to vacate.
Please remember that you cannot charge for any services provided beyond the end date of the
project, so it is important to ensure that all services you receive are closed out in time.
188
9.6.1 Maintaining Documentation
Your organization is required to retain all accounting records related to your award for at least three years
following submission of the final expenditure report. USAID retains the right to audit your organization any
time during those three years. Maintaining documentation also helps if you need to address litigation or
claims. Your sub-recipients must maintain the same documentation for three years following the end of your
award. Work with them to make sure they understand their obligations and retain all documentation in a safe
location. Note that some countries have their own records retention requirements that are longer than
USAID’s, so make sure that both you and your sub-recipients are aware of the provisions.
9.6.2 Post-Award Use of USAID-Funded Goods and Commodities
At its discretion, USAID determines the disposition of all USAID-funded goods and commodities.
As a grantee, you should review the regulations (22 CFR 226.34,

http://edocket.access.gpo.gov/cfr_2007/aprqtr/ pdf/22cfr226.34.pdf) regarding the sale or use of equipment
outside of award-related activities three months before the award end date. After reviewing the regulations,
prepare a disposition plan—a detailed description of what you propose to do with equipment or unused
supplies when the award ends. You must submit this to your AO, who will either approve your proposal or
provide further instructions.
9.6.3 Sale of Property and Equipment
The following regulations are specified for USAID grantees:
 USAID reserves the right to transfer the title to USAID or a third party. The AO must identify the
equipment appropriately or otherwise make it known to the recipient in writing. When USAID
exercises its right to take the title, the equipment will be subject to the Standard Provision, called
Title to and Care of Property.
 If you are instructed to dispose of the equipment, USAID will reimburse you for reasonable
expenses incurred in shipping the equipment to a new location. You will need to follow
procurement rules regarding competitive bidding to get the lowest-cost service.
 If you do not receive instructions within 120 calendar days after submitting your disposition plan,
you can sell the equipment and reimburse USAID for its share. You may deduct and retain US$500
from the USAID share, or if the item is worth more than US$5,000, you may retain 10% of the
proceeds for selling and handling expenses.
 Titles to supplies and other consumable equipment are vested with your organization when you
acquire them. If the value of the remaining new and unused supplies exceeds US$5,000 at completion
of the program, and the supplies are not needed for any other USG-sponsored projects, then you
may retain the supplies, but you must compensate USAID for its share of the cost. You may not use
supplies acquired with USAID funds to provide services to outside organizations for a fee that is less
than private companies charge for equivalent services, unless the USG specifically authorizes you to
do so.
 You must, at a minimum, provide the same type of insurance coverage for real property and
equipment acquired with USG funds as you provided to your organization’s other property.
 Your AO will give you special instructions if your agreement allows you to purchase any real estate,
including land or buildings.
189
9.6.4 Final Inventory Report
Within 90 calendar days after the award end date, you must submit a final inventory that lists all equipment
you acquired with award funds or received from USAID. The inventory is due, along with the final report,
and must be completed in accordance with the terms of your agreement and the disposition plan approved
by USAID. The final inventory must include:
 list of equipment costing US$5,000 or more with a useful life of one year or more you purchased
with USAID funds, and
 any unused supplies that cost US$5,000 or more. For each item listed, include:
 original cost;
 USAID share of the cost (for example, if your organization paid for part of the purchase with cost
share or matching, please note that);
 current location and condition of the equipment and/or how it is being used; and
 Detailed proposal of what you did or intend to do with that property. While the previous list
includes the standard requirements, Grant Agreements may vary. For example, instead of listing
equipment that costs US$5,000 or more, your organization may be required to list all equipment that
costs US$500 or more.
9.6.5 Other Close-Out Considerations
In addition to the key reports and activities that take place throughout the close-out phase, you must address
a number of other tasks before close out is complete. These tasks may not apply to everyone, but when
appropriate your organization should:
 Terminate Leases (if appropriate)—Terminate leases on rented office space that you do not
plan to use after the award.
 Insurance Policies—Cancel no-longer needed insurance policies.
 Outstanding Contracts—Close out any outstanding contracts with vendors, consultants, and
other contractors.
 Office/Facility Close Out—Be sure to take care of any obligations relating to closing your office
or other program facilities. For example, if you shared the office with other programs and had
agreements in place covering shared office costs, be sure to cancel these agreements and inform the
remaining occupants of your intention to vacate.
9.6.6 Letter to USAID
The final step of the entire close-out process is to send a letter to your CO confirming that you have
completed key close-out actions, including submitting the final invoice, inventory, and all other reports to
appropriate parties as well as closing out all subcontracts and sub-agreements.
Keep this letter on file, as USAID may request an update on your close out, and you can resend the original
letter.
190
Reference material
 22 CFR 226.71
 22 CFR 226.26
 22 CFR 226.31 to 226.37
 22 CFR 226.51
 22 CFR 226.52
 22 CFR 266.53
 ADS 540
 CIB 90-12
191
OFT MANUAL: FM Financial Sustainability of CSOs SECTION – 9
FINANCIAL SUSTAINABILITY OF CIVIL SOCIETY ORGANISATIONS

10.1 Financial Sustainability
Conventional Funding Sources; Corporate donors; Listed Public Limited

DIFD, UN, USAID and EU etc Companies
Management of grantees can obtain

Funding Portfolio of NGOs approved NGO status and tax exemption
under the relevant provisions of Income
Tax Ordinance 2001
Reserve Fund
10.2 Key details of corporate funding
 Section 61 of income Tax Ordinance 2001 encourages the Listed Public Limited Companies to pay
donations to approved charities
 Donations to approved charitable reduces the annual tax liability of listed Public Limited Companies
under section 61 of Income Tax Ordinance 2001
 The grantee management should take proactive steps to obtain approved NGO status and tax
exemption from tax authorities of Pakistan
 Corporate funding will diversify the existing conventional funding base of NGO
 Corporate funding will enable the grantee management to increase the quantum of endowment fund
for financial sustainability purposes
10.3 Establish Reserve Fund
To establish reserve fund as per the relevant provisions of constitutional documents of organization and
applicable registration statute
Relevant applicable registration statutes for civil society organizations in Pakistan
1. Societies Registration Act 1860 192
2. Trust Act 1882

10.4 Benefits of Reserve Fund
It is the responsibility of governing body and executive management to establish reserve fund to achieve
following strategic objective
1. To ensure financial sustainability in the foreseeable future

2. To ensure continuity of program and project activities for beneficiaries in the selected
geographical areas
3. To retain and utilize requisite human resources for the accomplishment of organizational
objectives during the defined strategic planning timeframe
4. To ensure perpetual succession of organization
10.5 Method to increase quantum of Reserve Fund
193
 To negotiate non-earmarked /unrestricted funding agreements with identified relevant donor agencies
 To incorporate management fee in the budgets of project proposals
 To design and increase the strategic program implementation scope / thematic areas in the light of
emerging grant environment in Pakistan
 To formulate grant strategy for obtaining corporate funding from listed Public Limited Companies
194
OFT MANUAL: FM Internal Controls and Income Tax SECTION – 10
US AGENCY REGs/INTERNAL CONTROLS & INCOME TAX LAW

10.1 Overview Relevant Tax Provisions
Approved NGO Status Civil Society Tax exemptions

Organization
Compliance with section 2 Compliance with sub clause 3

(36) of Income Tax of clause 58 of I Part of second
Ordinance 2001 schedule of income Tax
Ordinance 2001
10.2 Benefits of approved NGO status and tax exemption certificate
Section 2(36) of the ITO 2001
The Income Tax Ordinance, 2001 has for the first time introduced the term, non-profit organization. One
major distinction between the 1979 and 2001 Ordinance is that the former exempted income through a
process granting such exemption. The latter, on the other hand, recognizes the organization as a non-profit
organization and the exemption accrues automatically. This recognition not only exempts the income of the
organizations, but also the donation given by any taxpayer to such organizations. Section 2 (36) states that:
―Non-profit organization‖ means any person other than an individual, which is –
(a) Established for religious, educational, charitable, welfare or development purposes, or for the promotion
of an amateur sport;
(b) Formed and registered under any law as a non-profit organization;
(c) approved by the Commissioner for specified period, on an application made by such person in the
prescribed form and manner, accompanied by the prescribed documents and, on requisition, such other
documents as may be required by the Commissioner; and none of the assets of such person confers, or may
confer, a private benefit to any other person.
195
Since the term ‖charitable purposes‖ had not been defined in the 2001 Ordinance, this was introduced
through an amendment contained in the Finance Ordinance 2002 by the addition of clause 11(A) in Section 2
which reads ― charitable purposes includes relief of the poor , medical relief and the advancement of any
other object of general public utility‖.
Section 61 of the ITO 2001
Section 61 of the Ordinance specifies the extent and scope of tax benefit. An organization that has been
approved by the commissioner under Section 2(36) of Income Tax gets a ‗done status‘, meaning that any
donation (in cash or kind) are tax deductible subject to the conditions specified in section 61 of the
Ordinance. Specifically speaking, the done status conferred by this provision does not benefit the NPO
directly. In fact, it grants a fiscal benefit to the donor of an NPO. It acts as an incentive to an NPO having a
done status rather than an NPO without it. On the part of the government, ‘recognition factor also
contributes to the public benefit character of the NPO concerned. Section 61 states: (1) A person shall be
entitled to a tax credit in respect of any sum paid, or any property given by the person in the tax year as a
donation to -
(a) any board of education or any university in Pakistan established by, or under, a Federal or a Provincial
law;
(b) any educational institution, hospital or relief fund established or run in Pakistan by Federal Government
or a Provincial Government or a [Local Government]; or
(c) any non-profit organization
(2) The amount of a person‘s tax credit allowed under sub-section (1) for a tax year shall be computed
according to the following formula, namely: – (A/B) x C Where – A is the amount of tax assessed to the
person for the tax year before allowance of any tax credit under this Part; B is the person‘s taxable income
for the tax year; and C is the lesser of –
(a) The total amount of the person‘s donations referred to in subsection (1) in the year, including the fair
market value of any property given; or
(b) Where the person is –
(i) an individual or association of persons, thirty per cent of the taxable income of the person for the year; or
(ii) a company, [twenty] per cent of the taxable income of the person for the year.
(3) For the purposes of clause (a) of component C of the formula in subsection (2), the fair market value of
any property given shall be determined at the time it is given. (4) A cash amount paid by a person as a
donation shall be taken into account under clause (a) of component C of sub-section (2) only if it was paid by
a crossed cheque drawn on a bank. [(5) The [Board] may make rules regulating the procedure of the grant of
approval under sub-clause (c) of clause (36) of section 2 and any other matter connected with, or incidental
to, the operation of this section.]
Section 159 of the ITO 2001
When income of a CSO is exempt from tax or when a CSO is not likely to pay tax for a tax year for any
reason i.e. business tax losses, the CSO is entitled to exemption from withholding tax. In this case, CSO
applies to the Commissioner for a withholding tax exemption certificate. After making necessary inquiries,
the Commissioner shall issue a withholding tax exemption certificate. Consequently, tax will not be withheld
196
from payments to the CSO as authorized by the commissioner. Section 159 states: (1) Where the
Commissioner is satisfied that an amount to which Division II or III of this Part or Chapter XII applies is –
(a) Exempt from tax under this Ordinance; or
(b) Subject to tax at a rate lower than that specified in the First Schedule,
The Commissioner shall, upon application in writing by the person, issue the person with an exemption or
lower rate certificate. (1A) The Commissioner shall, upon application from a person whose income is not
likely to be chargeable to tax under this Ordinance, issue exemption certificate for the profit on debt
referred to in clause (c) of sub-section (1) of section 151.
(2)A person required to collect advance tax under Division II of this Part or deduct tax from a payment
under Division III of this Part or deduct or collect tax under Chapter XII] shall collect or deduct the full
amount of tax specified in Division II or III or Chapter XII, as the case may be, unless there is in force a
certificate issued under sub-section (1) relating to the collection or deduction of such tax, in which case the
person shall comply with the certificate. (3) The Board may, from time to time, by notification in the official
Gazette –
(a) Amend the rates of withholding tax prescribed under this Ordinance; or
(b) Exempt persons, class of persons, goods or class of goods from withholding tax under this Ordinance. (4)
All such amendments shall have effect in respect of any tax year beginning on any date before or after the
commencement of the financial year in which the notification is issued and shall not be applicable in respect
of income on which tax withheld is treated as discharge of final tax liability. (5) The Board shall place all
notifications issued under sub-section (3) in a financial year before both Houses of Majlis-e-Shoora
(Parliament).
Clause 58 of II Schedule of ITO 2001
The tax benefits under clause 58 of II Schedule of the Income Tax Ordinance are granted to the NPOs by the
Regional Commissioner of the Income Tax. Section 2(11B) of ITO 2001 defines Chief Commissioner as a
person appointed as Chief Commissioner Inland Revenue under section 208 and includes a Regional
Commissioner of Income Tax and a Director General of Income Tax and Sales Tax. Applications are made to
the Chief Commissioner office or any of his designated functionaries. This clause basically provides
exemption on the business income of an NPO. Business income includes income from donations, grants by
national and international donors, grants by the government, subscriptions, membership contributions, house
rent, profit on bank accounts, investments in the securities of the federal Government etc. Exemption is
available on the funds expended in Pakistan on carrying out the stated public benefit activities of the NPO.
Clause 58 of II Schedule states: (1) Any income of a trust or welfare institution or non-profit organization
specified in sub-clauses (2) and (3) from donations, voluntary contributions, subscriptions, house property,
investments in the securities of the Federal Government and so much of the income chargeable under the
head "Income from business‖ as is expended in Pakistan for the purposes of carrying out welfare activities:
Provided that in the case of income under the head "Income from business", the exemption in respect of
income under the said head shall not exceed an amount which bears to the income under the said head the
same proportion as the said amount bears to the aggregate of the incomes from the aforesaid sources of
income. (2) A trust administered under a scheme approved by the Federal Government in this behalf and
established in Pakistan exclusively for the purposes of carrying out such activities as are for the benefit and
welfare of-
(i) Ex-servicemen and serving personnel, including civilian employees of the Armed Forces, and their
dependents; or
197
(ii) ex-employees and serving personnel of the Federal Government or a Provincial Government and their
dependents, where the said trust is administered by a committee nominated by the F Federal Government
or, as the case may be, a Provincial Government.
(3) A trust or welfare institution or non-profit organization approved by Regional Commissioner of Income
Tax for the purposes of this sub-clause.
10.3 Prescribed procedures to obtain approved NGO status and tax exemption
In order to obtain approval, a CSO is required to follow certain procedures. Income Tax Rules (ITR) 2002
has classified these approvals in two categories; an approval under section 2(36), these cases are dealt by
Commissioner (Legal) in the Regional Tax Offices (RTOs) and an approval for purpose of sub-clause (3) of
clause 58 of Part I of the Second Schedule, these cases are dealt by the Chief Commissioner Office in the
RTOs. In both cases, a CSO is required to an application to the concerned authorities in a prescribed form.
10.3.1 Procedure/Essential requirements under section 2(36) of the ITO 2001
Rule 211 of the ITR 2002 prescribes the procedure for the processing of an application for the approval of an
NPO under section 2(36). It means that approval is accorded in accordance with the clause (36) of section 2
of the ITO 2001 and Rules 211 to 220 of ITR 2002. This category of charity for the purposes of ITO 2001 is
referred to as NPO. Rule 211 states:
(1) An institution, fund, trust, society or any other non-profit organization (hereinafter referred to in this
Chapter as organization) established in Pakistan for religious, educational, charitable, welfare or development
purposes or for the promotion of an amateur sport requiring approval of the Commissioner under clause
(36) of section 2 of the Ordinance, shall make an application to the Commissioner in the following form,
namely:
198
APPLICATION FOR APPROVAL FOR THE PURPOSES OF CLAUSE (36) OF SECTION 2 OF

THE INCOME TAX ORDINANCE, 2001
To, The Commissioner of Income Tax, __________Zone, _________ (City)

1. With reference to clause (36) of section 2 of the Income Tax Ordinance, 2001 (XLIX of 2001), I the
undersigned, hereby apply, on behalf of __________ (name of the organization) for its approval for the
purposes of the said clause for the tax year ending on ________.
2. Necessary particulars are set out below, and in the schedule to this application.
3. The following documents required under sub-rule (2) of rule 211 of the Income Tax Rules, 2002, are
enclosed.
Signature________________________
Name (in block letters) ______________
Designation ______________________
Application must be signed either by the President or the Secretary of the organization or by a Trustee, of
the trust. SCHEDULE PARTICULARS
1. Name of the organization (in block letters) ________________________

2. Full address of the organization (in block letters) ___________________
3. Date of registration of the organization ___________________________
4. Its aims and objects.
(a) ____________________________________________________
(b) ____________________________________________________
(c) ____________________________________________________
(d) ____________________________________________________
5. Whether the organization has been registered under the Societies Registration Act, 1860 (XXI of 1860),
or the Voluntary Social Welfare Agencies (Registration and Control) Ordinance, 1961 (XLVI of 1961), or any
other law in substitution thereof relating to the registration of welfare organization or established in
pursuance of a Trust Deed. Please give/state the law and the number and date of registration
______________________.
6. Whether constitution, memorandum and articles of association, trust deed, rules and regulations or bye-
laws, as the case may be, conform(s) to the provisions of sub-rule (1) of rule 213. If so, please give the
number of Article/ Clause/ Rule etc., for each provision.
7. Whether the organization ensures for the benefit of the general public or a particular community or class
of persons only (give full details).
8. The number of members /trustees of the organization on the date of application.
9. Accounting year of the organization commences on ___________and ends on ___________.
10. The following books of accounts are being regularly maintained by the organization and are open for
inspection without any hindrance to the general public.
i) _______________________________ ii) _______________________________ iii)

_______________________________ Signature_______________________ Name (in block letters)
____________ Designation_____________________
(2) An application under sub-rule (1) shall be accompanied by –
199
a) duly attested copy of the constitution, memorandum and articles of association, rules and regulations or
bye laws, as the case may be, of the organization specifying the aims and objects for which it is established;
b) A certified copy of the registered trust deed, in case of a Trust;
c) a certified copy of certificate of registration in the case of an organization registered under the Societies
Registration Act, 1860 (XXI of 1860), the Voluntary Social Welfare Agencies (Registration and Control)
Ordinance, 1961 (XLVI of 1961), or under any other law in substitution thereof relating to the registration of
welfare organization as applicable;
d) duly attested copies of the balance sheet and of revenue accounts of the organization as audited by a
―qualified accountant‖ for the year immediately preceding the year in which the application is made;
e) the names and addresses of the promoters, directors, trustees, president, secretary, treasurer, manager
and other office bearers, as the case may be, of the organization, and indicating clearly their family
relationships, if any, with each other;
f) For the purposes of clause (d), ―qualified accountant‖ means, -
i. a retired audit, accounts, treasury or taxation officer of the Government not below BPS- 17 or a bank
manager, where the annual receipts of the organization do not exceed Rs. 0.5 million;
ii. Omitted
iii. in other cases, a Chartered Accountant as defined under the Chartered Accountants Ordinance, 1960 (X
of 1960) or a Cost and Management accountant as defined under the Cost and Management Accountants
Act, 1966 (XIV of 1966) or a firm of Chartered Accountants as defined under the Chartered Accountants
Ordinance, 1960 (X of 1960) or a firm of Cost and Management Accountants as defined under the Cost and
Management Accountants Act, 1966 (XIV of 1966);]
g) a detailed report with regard to the performance of the organization for achieving its aims and objects
during the 3[preceding financial year] preceding the date on which application is made, duly evaluated and
certified by an independent certification agency approved by an authority designated by the Government of
Pakistan for this purpose or, till that authority is established, under arrangements made by the or
Commissioner of Income Tax.
Provided that till the approval of two such agencies, the applicant organization shall have an option to get its
performance appraised by Director-General, Regional Tax Office or Large Taxpayers Unit. Provided further
that Director-General or Officers of Regional Tax Office or Large Taxpayer Unit, shall apply the same
parameters on applicant organizations for the purpose of aforesaid evaluation as are approved by the FBR to
be applied by the certification agency. In addition to above mentioned information given in the application,
the Commissioner may require further information as he considers necessary. An approval by the
Commissioner is notified in the official gazette and is valid until 30th June of the following tax year. The
approval may be subject to certain conditions as the Commissioner considers necessary. The Commissioner
is required to dispose of an application within two months of receipt of it.
10.4 Procedure/Essential requirements under sub-clause (3) of clause (58) of Part I of the
Second Schedule
200
Rule 220-A of the ITR 2002 prescribes the procedure for the processing of an application for the approval of
an NPO for the purpose of sub-clause (3) of clause (58) of Part I of the Second Schedule. It describes the
detailed procedure for the processing of case of approval under sub-clause (3) of clause (58) of Part I of the
Second Schedule. The Chief Commissioner‘s Office of the RTOs entertains the applications under this
category. A CSO approved by the Regional Commissioner of Income Tax (RCIT) under this sub-clause is
additionally entitled to tax exemption on its property, income and that part of its business income as is
expended in Pakistan for welfare activities. Broadly speaking, taxable business income is computed after
deducting tax admissible expenditure and allowances from the gross amount of revenue. Expenditure directly
related to taxable business income is tax deductable in entirety. Any expenditure that cannot be entirely
related to business income for being partly related to income from any other source will be apportioned
between business income and income from other sources on a reasonable basis. Expenditure apportioned to
business income only will be tax deductible against taxable business income.
The gross tax liability computed with reference to taxable income for a tax year will be reduced by the sum
total of the following:
a) Taxes withheld from payments

b) Taxes paid with utility bills
c) Taxes paid in advance
d) Unpaid tax refunds
After adjusting the amount of gross tax liability for the above, the net resultant will be paid with the tax
return. In case, the sum total of a) to d) above is in excess of the tax liability for the tax year, the excess
amount will be refundable. Tax exemption in relation to business income is restricted according to the
following formula: A *A/ B Where – A is income from business; and B is the aggregate of income from
following sources:
a) Donations, voluntary contributions and subscriptions

b) Property income
c) Profit (interest) from Government securities
d) Business income
Rule 220-A states: (1)An organization established in Pakistan requiring the approval of the Regional
Commissioner of Income Tax under sub-clause (3) of clause (58) of Part I of the Second Schedule to the
Ordinance, shall;
A. makes an application to the 4[Regional Commissioner of Income Tax] in Form I annexed to this rule;
B. the application shall be accompanied by —
(i) a duly attested copy of the constitution, memorandum and articles of association, rules and regulations or
bye-laws, as the case may be, of the organization specifying the aims and objects for which organization is
established;
(ii) A certified copy of the registered trust deed, in case of a Trust;
(iii) a certified copy of the certificate of registration in the case of an organization registered under the
Societies Registration Act, 1860 (XXI of 1860), or the Voluntary Social Welfare Agencies (Registration and
Control) Ordinance, 1961 (XLVI of 1961), or under any other law in substitution thereof relating to the
registration of welfare organizations as applicable;
(iv) duly attested copies of balance sheets and of revenue accounts of organization as audited by a ―qualified
accountant‖ for the three years immediately preceding the tax year in which the application is made;
201
(v) the names and addresses of the promoters, directors, trustees, president, secretary, treasurer, manager
and other office bearers, as the case may be, of the organization and indicating clearly their family
relationships, if any, with each other; and
(vi) A detailed report with regard to the performance of the organization, for achieving its aims and objects
during the three financial years immediately preceding the date of the application duly evaluated and certified
by an independent certification agency approved and appointed by the Federal Board of Revenue.
Provided that the Director-General, Regional Tax Office or Large Taxpayers Unit shall also receive
applications for performance appraisal and certification of applicant organizations till at least two such
agencies have been appointed: Provided further that Director-General or Officers of Regional Tax Office or
Large Taxpayer Unit shall apply the same parameters on applicant organizations for the purpose of aforesaid
evaluation as are approved by the FBR to be applied by the certification agency. (2)(a) On receipt of an
application for registration under this rule, the Regional Commissioner of Income Tax, subject to the
requirements and conditions specified in sub-rule (3) and after such inquiry as it may deem necessary, grant
approval to the organization if ---
i. the organization has been formed for the purpose of establishing hospitals or providing education or for
community welfare or development;
ii. it has operated and functioned anywhere in Pakistan, for a period of not less than three years and has
complied with minimum acceptable standards of internal governance, accountability, transparency and
efficiency prescribed by any law for the time being in force;
iii. Its area of operation is wholly within Pakistan; and
iv. Its books of accounts are maintained regularly and in accordance with the generally accepted accounting
principles and satisfactory arrangements exist for their inspection by interested members of the public.
The above mentioned application form is applicable in this case with the difference of mentioning respective
sub-clause of Second schedule and addressing application to the RCIT. An approved NPO by the RCIT is
notified in the official gazette. The approval granted under rule 220-A (2) will remain in force for subsequent
years unless withdrawn under sub-rule 7 of rule 220-A. For the purposes of the rule 220-A, qualified
accountant has the same meaning as assigned to it in clause (f) of sub rule (2) of rule 211.The RCIT can relax
or modify any requirement or condition in any individual case as he may consider necessary. According to
2nd schedule Part I clause 59 and 60, income from the following sources is exempt from tax regardless of the
fact whether the CSO is an unapproved CSO or is approved by the Commissioner or by the RCIT. Gross
income of a CSO will be split between income from exempt sources and income from taxable sources:
Voluntary contributions
Profit (interest) from schedule banks
Profit (interest) from investment in securities of the federal Government
Grants received from the Federal, Provincial or District Government
Foreign grants
Income from property held under trust
Income of a CSO from the following sources is considered taxable:
Profit (interest) from non-scheduled banks and financial institutions

Dividend
Capital gains
Income from property not held under trust
Taxable business income
202
10.5 PCP Certification Model
Pakistan Centre for Philanthropy (PCP), established in 2001 under section 42 of The Companies Ordinance,
1984, is an independent, nonprofit, support organization created to facilitate collaboration among the
philanthropists, nonprofits organizations (NPOs) and the government for social development in Pakistan. It is
led by an independent Board of Directors, comprising eminent citizens and leaders from the corporate
sector and civil society. Its mission is to promote the volume and effectiveness of philanthropy for social
development in Pakistan. The Centre runs a number of program to achieve its objectives. The NPO
Certification Program is its flagship program.
The certification regime developed by PCP in 2002-03 endeavors to set sector wide standards of good
internal governance, transparent financial management and effective program delivery. The purpose is to
strengthen the civil society by bridging the information and credibility gap that exists between the donors and
recipient organizations. The Government of Pakistan in the Revenue Division authorized PCP as the first
NPO Certification Agency vide notification no 1116(1)/2003 dated December 18, 2003.
An organization may wish to obtain certification for enhancing its credibility in the wider public (including
donors) view or for obtaining tax benefits from the Central Board of Revenue (CBR1) or for both. The
Certification Model (which contains the standards and process of evaluation) applies in either case.
PCP’s certification focuses on the examination of structures, systems, procedures and processes put in place
by an organization to deliver the services it promises and to ensure sustainability of its programs. It falls
beyond the mandate of certification process to evaluate the degree of success of programs except to the
extent it is reflected in the standards of program implementation.
Some important points about the certification regime are given below:
1) The pre-requisites for consideration of an application for PCP certification are contained in Section I. An
application by an NPO will only be processed if it meets these requirements.
2) An NPO applying for certification for the purpose of availing tax benefits (under Section 2(36) and/or
under Clause 58 of the 2nd Schedule of Income Tax Ordinance, 2001) must also comply with the
requirements of the Income Tax Ordinance, 2001 and the Income Tax Rules2, 2002. Although it is the
prerogative of the relevant authorities in the CBR to finally check an organization’s compliance with these
requirements, PCP will also examine the applicant organization’s status viz a viz these provisions and
submit its observations and recommendations to the NPO concerned.
3) PCP’s Certification Model consists of standards organized in three categories (Section II) against which an
NPO is assessed. The three categories relate to NPO’s internal governance, financial management and
program delivery.
4) Fulfillment of these standards fetches scores for the NPO. A maximum score is assigned to each
standard. In most cases, score assigned to a standard is further divided into smaller components
depending upon the ingredients of the standard and various aspects like degree of compliance etc.
5) Wherever expressly provided an NPO is assigned score on a standard on a defined range. The maximum
attainable score for all standards is 1000. Details of these standards and the scoring system are given in
Section II. An NPO must attain a total score of at least 600 (and a minimum 50% score in each individual
category) to be certified by PCP.
1 The term CBR, wherever used in this Model, also includes its field offices, unless the context provides to the contrary.
2 Relevant provisions from the Income Tax Ordinance, 2001 and the Income Tax Rules, 2002 are available on PCP web site
(www.pcp.org.pk).
203
6) Applicability of standards varies according to the size of the NPO. This is highlighted in the second last
column of each table of Section II. For this purpose, the NPOs are divided into small, medium or large
organizations as under3:
a) If the average of total annual receipts of an NPO during the last three years is less than Rs. 1.0
million, it is a small NPO;
b) If the average of total annual receipts of an NPO during the last three years is more than Rs. 1.0
million but less than Rs. 5.0 million, it is a medium NPO; and
c) If the average of total annual receipts of an NPO during the last three years is more than Rs. 5.0
million, it is a large NPO.
7) In case a standard (or its component) does not apply to an NPO being evaluated, marks will be assigned
on a pro-rata basis for such not-applicable standard (or component thereof).
8) Appendix I and II display the workflow of certification process. These charts indicate that:
a) When an NPO applies to PCP for certification, a team of evaluators (comprising a Program Officer
(PO) and an evaluator) is assigned to the case. For the purposes of evaluation two basic instruments
are applied – the Desk Review and the Field Evaluation.
Desk Review involves examination of application and supporting documents furnished by the NPO.
The Field Evaluation (comprising a visit to the organization (including any branches or facilities/
outlets) on a mutually convenient date) involves examining the field records; reviewing program
delivery; and meetings with governing body members, the executive head(s), and managerial and
program staff of the organization. A brief beneficiary feedback survey is also conducted.
b) The Desk Review of the applicant NPO is conducted first. If the organization meets the pre-
requisites as contained in Section I, its application is processed further. If not, the application is
returned to the organization and the reason(s) for doing so are specified.
c) If the organization has applied for certification for seeking tax exemptions, its compliance with the tax
related provisions given in Section I is also checked. If the organization complies, PCP proceeds
further with the evaluation of the organization. If not, the application is returned to the organization
and the reason(s) for doing so are specified.
d) The NPO’s case is then assessed and scored against standards contained in Section II. Once the Desk
Review is completed, Field Evaluation of the organization is conducted and the NPO is awarded
score on relevant standards.
e) Both Desk Review and Field Evaluation, evaluate the NPO’s performance in achieving its aims and
objectives during the last three years.
f) On the basis of such evaluation, the PO prepares a detailed report. The detailed report contains an
assessment of the NPO’s performance in the areas of internal governance, financial management and
program delivery, the scores obtained by the organization on all the standards and its financial
highlights over the last three years.
g) Once finalized, the report is shared with the concerned organization and its
comments/observations/reservations/feedback on the report is duly considered.
h) The assessment report along with the feedback received by the organization is then placed before
the Certification Panel, which is the final authority to grant or refuse the certification application of
an NPO. The Panel is a five-member independent body, three of which are nominees of the PCP
3 This categorisation of NPOs derives from the general consensus of various stakeholders expressed in the consultative process that led
to the development of this Model.
204
Board of Directors and two represent the Government of Pakistan4. The Certification Panel
deliberates upon the report and recommendation of PCP5 and examines the comments received
from the organization. The Panel may or may not concur with PCP’s recommendation in any given
case or it may send the case back to PCP for re-evaluation.
i) If the Certification Panel decides to grant the NPO’s application for certification, PCP issues a
certificate to the NPO in the prescribed format. If, however, the Certification Panel decides to refuse
the application for certification, it will advise PCP to regret issuance of the certificate to the NPO.
The Panel may also decide to defer the NPO’s application for certification for a certain period of
time – ranging to a maximum of 1 year. This provides the NPO concerned an opportunity to make
up some of the deficiencies and qualify for certification. In case of either deferral or rejection, the
Panel’s reason(s) for doing so are also duly recorded.
j) The Panel may, on PCP’s recommendation or the NPO’s request or on the basis of its own
judgment, defer its decision regarding an organization. However this deferral is for a period not
exceeding one year.
k) Once an organization has been certified, PCP designs its web profile and places it on the Centre’s
website. The profiles are derived from the evaluation conducted and prepared in consultation with
the certified NPO. PCP periodically publishes these profiles in the form of a Directory of Certified
NPOs.
l) In the event of applying for tax exemptions the NPO is required to furnish the certificate and the
detailed evaluation report to CBR authorities (i.e. Chief Direct Tax Operations, CBR or the Zonal
Commissioners of Income Tax) along with other required documents.
9) Every effort is made to complete the process of certification within 10-12 weeks of the NPO furnishing
it’s duly filled in application. This, however, might take longer in case of NPOs that do not furnish some
of the documents required with the application or if they do not submit their response to PCP’s
evaluation report within the prescribed time.
10) Certification is valid for three years following the date on which certificate is issued. All subsequent
renewals of certification are also valid for the same period of time. The renewal is based on a fresh
evaluation.
11) A certified organization should apply to PCP for renewal of certification within three months of the
expiry of validity of certification earlier granted.
12) PCP informs the CBR and any other Certification Agencies of the names of certified, deferred and
rejected organizations, immediately after the Panel decision.
13) All information provided by an organization applying for certification is deemed public information unless
specified otherwise.
14) The Certification Panel may withdraw certification in case of NPO’s dissolution, bankruptcy, failure to
comply with mandatory reporting requirements, utilizing the funds or property of the NPO for the
benefit of people other than the stated beneficiaries, any of the information provided by the NPO having
been proved to be false, or any of the material information proved to have been deliberately concealed
by the organization. Certification, however, shall not be withdrawn without giving the NPO concerned an
opportunity of explaining its position in this regard.
205
15) Certification is a highly subsidized process and the applicant NPO pays a small proportion of the total
cost of evaluation and certification (depending upon its size), the rest being borne by PCP. The subsidy is
provided on a graduated scale so that the largest subsidy goes to the smallest NPO6.
16) In addition to certification, PCP also plays a role in the development and promotion of NPOs.
a) Capacity building is an important part of the certification regime. The capacity of an organization is
built during the certification process itself. In case of those organizations that do not meet the
required standards for certification, PCP facilitates linkages with specialized capacity building
organizations.
b) If the certified NPO intends to apply for tax exemptions under relevant laws, PCP also provides
assistance in preparing required documents for submission to the CBR.
17) The Model is a living document, which is reviewed periodically in consultation with all stakeholders. The
first such review was conducted in 2005-06.
18) Certain concepts and definitions used in this Model are explained below:
a) ‘Benchmark’ is a measurement or standard that serves as a point of reference by which process
performance is measured.
b) ‘Beneficiaries’ are the men and women, communities, or organizations expected to benefit from the
projects or programs.
c) ‘Best Practices’ are the processes, practices, or systems identified in organizations that performed
exceptionally well and are widely recognized as improving an organization’s performance and
efficiency in specific areas. Successfully identifying and applying best practices can reduce expenses
and improve organizational efficiency.
d) ‘Budget’ means an estimate of future incoming funds, expenditure and other applications of funds for
a particular accounting period.
e) ‘By laws’ are the rules governing the operation of a nonprofit organization. By laws often provide the
methods for the selection of directors, the creation of committees, the conduct of meetings and
other matters of similar nature.
f) ‘Capacity’ means all the resources available to an organization, including people, money, equipment,
expertise, linkages and information.
g) ‘Capacity building’ is a coordinated process of deliberate interventions by insiders and/or outsiders of
a given organization leading to (i) skill upgrading, both general and specific; (ii) procedural
improvements; and (iii) organizational strengthening. Capacity building refers to investment in people,
systems, institutions, and practices that will, together, enable organizations to achieve their
development objective. Capacity is effectively built when these activities are sustained and enhanced
with decreasing levels of external dependence accompanied by increasing levels of goal achievement.
h) ‘Charitable organization’ is an organization that is created and operated exclusively for religious,
scientific, literary, educational, athletic, public safety, social development, rights advocacy or
community service purposes, and does not distribute earnings, profits or surpluses to its members or
staff.
i) ‘Charter’ means a description in writing of the purposes, aims, objects and the mode of functioning of
an organization. These may include the constitution, memorandum or articles of association, or the
trust deed, depending upon the law whereby the NPO is registered.
206
j) ‘Chief Executive Officer’ means the executive head of the organization working under the supervision
and control of the governing body.
k) ‘Directory’ means a Directory of organizations certified by PCP. This document contains detailed
organizational and program information about NPOs included therein with an intent of promoting
them from PCP platform.
l) ‘Disclosure’ for the purposes of this Model, means disclosure to the general public, notwithstanding
any legal or statutory requirement to do so. There could be different means and modes of disclosure.
For evaluation purposes, information or data shall be deemed to have been publicly disclosed once it
is:
I. Published in a document which is meant for wide distribution; or
II. Placed on a website; or
III. Submitted to a government department as public information.
m) A ‘donor’ is the one who gives something without receiving consideration for the transfer.
n) ‘Endowment’ is the principal amount of gifts and bequests that are accepted subject to a requirement
that the principal be maintained intact and invested to create a source of income for an organization.
o) ‘Evaluation’ means an assessment of an organization, its program(s) or project(s) (irrespective of
whether the same have concluded or not). Evaluation also involves articulation of opinion and
comments on the organizational structures and on the state of program delivery of an NPO. It is a
management tool that is built around a formal process for evaluating performance and impact that
help measure progress towards achieving intermediate targets or ultimate goals.
p) ‘External evaluation’ means any evaluation conducted by an individual or organization that is external
to the NPO being evaluated. The Terms of Reference (ToRs) are defined by an external
commissioning authority, and the evaluation report is primarily for an audience external to the
organization. ‘Internal evaluation’, on the other hand, means any evaluation conducted by an
individual or organization, either internal or external to the NPO, for primarily the internal audience
of an NPO. Typically, the ToRs for an internal evaluation are also defined by the Board or the
management of the organization.
q) ‘Financial System’ is an information system, comprised of one or more applications, that is used for
any of the following: collecting, processing, maintaining, transmitting and reporting data about financial
events; supporting financial planning or budgeting activities; accumulating and reporting cost
information; or supporting the preparation of financial statements.
r) ‘Fixed assets’ include land, building, vehicles and equipment.
s) ‘Governing body’ (GB) means the body, board, council or committee of directors, trustees or
executives, as the case may be, in which control of the NPO is vested. Its name, for any given NPO,
may depend upon the law whereby the NPO is registered or owes its juristic personality (e.g. for an
NPO registered under section 42 of The Companies Ordinance, the Board of Directors is the
governing body). For the purposes of this Model, any subcommittee of governing body formed with a
specific mandate is deemed to be the governing body for that purpose.
t) ‘Grievance Settlement Procedure’ is a procedure for staff to object to and seek redressal against an
order from a colleague or a senior officer that they believe to be illegal, unethical or
counterproductive.
u) ‘Indicator’ is a feature or phenomenon that can be objectively measured in quantitative or qualitative
terms as a means of gauging progress toward achieving a goal or measuring the impact of a specific
intervention.
207
v) ‘Managerial staff or management’ of an NPO includes all persons performing organizational functions
which are (wholly or in part) supervisory in nature.
w) ‘Monitoring’ is a continuous activity to keep track of and record what actually happens in a project or
program. Monitoring systems comprise procedural arrangements for data collection, analysis and
reporting. It also defines reporting channels and requirements.
x) ‘Nonprofit Organization’ is an organization that is formed and registered under any law for religious,
educational, health, environment, charitable, welfare or development purposes, promotion of
amateur sport or for any other purpose of general public benefit. It is a nonprofit distributing
concern i.e. all its income, commodities, property and other assets are applied solely towards the
promotion of its objectives and none of its assets or income are paid or transferred directly or
indirectly by way of dividend, bonus, remuneration, grant of other benefits by way of profit or
otherwise howsoever; to any of its member or the relative or relatives of a member or members.
y) ‘Outcome’ is the ultimate, long-term resulting effect – both expected and unexpected – of the
beneficiaries’ use or application of the organization’s outputs.
z) ‘Outputs’ are direct products of a program’s activities, generally measured in relation to inputs. They
are quantitative and are typically measured by ‘how many’, ‘how often’ and ‘over what duration’.
aa) ‘Output Indicators’ are the specific characteristics or behaviors measured to track a program’s
success in achieving its outputs. They further define outputs and make them measurable.
bb) ‘Overall salary structure’ includes (but is not limited to) any established brackets or grades of salary
and perks applicable on the employees of the NPO, and average salary of managerial and secretarial
staff.
cc) ‘Policy’ means a document, duly approved by the governing body (or a sub-committee or the
management, whosoever is authorized for such approval), which provides the details of procedures
and processes to be adopted by the management of NPO to address any given issue on a specific
subject, e.g. personnel policy, recruitment policy. For the purposes of this Model, following aspects of
any given policy of an NPO are included in the definition of policy per se:
I. Approval procedure
II. Extent of implementation
III. Mechanism to put it into practice
IV. Wide knowledge among the staff that the policy exists
dd) ‘Pursuance of personal gain’ would include using official position in the organization for obtaining any
kind of material benefit either directly or indirectly, other than the payment for services provided.
ee) ‘Staff’ unless specified otherwise includes all paid workers, consultants and advisors of the NPO.
ff) ‘Transparency’ involves sharing information and acting in an open manner. Transparency allows
stakeholders to gather information that may be critical to uncovering abuses and defending their
interests. Transparent systems have clear procedures for decision-making and open channels of
communication between stakeholders and organizations, and make a wide range of information
accessible.
gg) ‘Unrelated persons’ are those who are not related to each other by relation of blood or marriage.
For the purposes of this Model, relations by blood include parents, siblings, children, grandparents
and real uncles/ aunts: Relations by marriage include spouse, brothers/ sisters-in-law and parents-in-
law.
208

Operations Focused Training Financial Management

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Operations Focused Training Financial Management

Uploaded by

Copyright:

Available Formats

PARTICIPANTS’ HANDBOOK

SECTION - 01 - INTRODUCTION TO FINANCIAL MANAGEMENT

SECTION - 02 – COST PRINCIPLES

OPERATIONS FOCUSED TRAINING

SECTION - 04 – BOOK KEEPING FOR NGOS

SECTION - 05 – CASH MANAGEMENT

SECTION - 06 – PAYROLL MANAGEMENT

SECTION - 07 – PROJECT FINANCIAL REPORTING

SECTION - 09 – AWARD CLOSE-OUTS

SECTION - 10 – TAXATION AND FINANCIAL SUSTAINABILITY

Session # Session title Page no

1 Introduction to Financial Management ------------------------------------- 1

2 Cost principles ---------------------------------------------------------------------- 23

3 Budgeting and Planning ---------------------------------------------------------- 68

4 Accounting & Reporting system ---------------------------------------------- 74

5 Cash management system ------------------------------------------------------ 95

6 Payroll management -------------------------------------------------------------- 110

7 Financial Audits --------------------------------------------------------------------- 138

8 Project Closeouts------------------------------------------------------------------- 180

9 Financial Sustainability of CSOs------------------------------------------------ 192

10 Internal Controls and Taxation ------------------------------------------------ 195

1.1 WHAT IS FINANCIAL MANAGEMENT?

Financial Management brings together

 Finances enable an organization to continue existing.

Financial management serves organizational goals in the following ways:

 Obtain funding for programs.

1.2 OVER VIEW OF FINANCIAL MANAGEMENT SYSTEM:

WHAT DOES GOOD FINANCIAL MANAGEMENT INVOLVE?

Four Key Pillars of Financial Management

1.3 COMPONENTS OF A GOOD FINANCIAL MANAGEMENT SYSTEM:

How accounting can help organizations achieve their goals:

 It provides figures for planning compromise positions.

A practical accounting system for an organization typically consists of the following:

i. The Funding Agreement

 activities to achieve the deliverables

ii. The Budget

The following expenses are usually not allowed by donors:

 lobbying – includes direct legislative lobbying and grassroots lobbying;

iii. Bank Accounts

 preparation of bank reconciliations and approval thereof;

iv. Petty Cash

 Cash is kept in a cash box in a secure, lockable cupboard or a safe.

In the case of general purchases (fuel, stationery, refreshments, cleaning material):

 a purchase order is completed before the item is purchased;

vi. Recording Of Project Activities

Narrative reporting on activities

 an attendance register, signed by all participants of workshops, conferences and seminars;

Financial reporting on activities

 venue costs – rental of hall

When planning an activity, expenses must be aligned with the budget.

The procedure for payment in cash is as follows:

 each payment from petty cash is recorded on a cash requisition form

viii. Bank Transactions – Cash Book

 opening balance at the beginning of the month

ix. Cash Transactions – Petty Cash

All transactions are recorded on a schedule indicating:

 opening balance at beginning of the month

 Payments made from petty cash.

x. Monthly Summaries Of Expenses

xi. Trial Balance

xii. Balance Sheet And Income Statement

xiii. Audited Annual Financial Statements

An external audit is an independent report that covers:

 a copy of the organization’s constitution