Archive for June, 2012

How to expense Funds before they are received? An Experience from Croatia

Tuesday, June 12th, 2012


Cash is cash, and trust is trust; and, of course, we are not so cash-minded that we only trust into the US-dollar. First of all, we trust into each other, isn´t it? 

Thus, the question arises: May I spend funds before I received them in cash? I mean, when I trust into the integrity of my donor, why should I not belief into his promises. I could take cash from my unrestricted funds or from other donors to prefinancance other projects – why not? However, there is a problem, how to book these expenses. I would like to book them against a receivable from the donor. If I do so, I should probably book all trust worthy receivables from donors into my balance sheet. In this case, many accountants would panic. Isn´t this a overestimation of our financial position? May I be charged with financial fraud? Panic, panic, panic!  So, better to book only in these very special cases a receivable… However, then, I would create an inconsistency: Sometimes, I would book a receivable, sometimes not. This is also not nice. What to do?

 When one of our clients in Croatia faced this problem, the following discussion emerged between me and my deeply honoured colleague from Rijeka, Mr. Boris Vidas, which we would like to document here:


 Dear Boris,

 I would like to make the following bookings:

 a)            When the project contract is signed

Debit agreed rights                                    Credit contractual duties to perform

And in order to calm your nerves, this should be a back-balance sheet account.

 b)           When amounts are expensed (before cash from the donor is received)

 to book the expenses:

Debit expense account                               Credit cash/accounts payable

To book the receivables from the donor on the basis of a monthly report:

Debit receivable from donor                     Credit restricted net assets

Debit restricted net assets                         Credit Revenue (a reclassification booking)

 And of course a memory booking in order to reduce the amount of contractual duties

Debit contractual duties to perform        Credit agreed rigthts (memory entry)

Note: Revenue and expense can be different as the report to the donor might have other regulations (other exchange rate or other accounting basis). In fact, the report to the donor is very similiar to an invoice. The comparison of revenue and expenses show whether the project handling was efficient.

 c)           When cash is received from the donor:

Debit cash                                                     Credit receivables from donor 

Please write down your suggested bookings. You mean that these advance payments would be first reduce our unrestricted net assets, and later, when the restricted funds are received, they should be classified somehow as unrestricted revenue?

I would say that, in this style, the financial position is underestimated, and that there is a risk that receivables are lost, because they are not recorded. This is certainly no good idea.

 Are  you allowed to book revenue, when collection is reasonably assured? I mean, we have very little reasons to believe that our donors are less reliable than commercial firms.  Look, a default of the church is less probable then a default of General Motors, for instance. This is a difference in stability (2000 years against merely a century). So why not?

Also, we could say, that project contracts are LONG TERM contracts, similiar like construction contracts. This would also allow a kind of“ completion of contract method“.

However, these are only auxiliary arguments. The main argument should be: The above indicated booking gives a true representation, while the regulation in your Croatian instruction does not give a true representation. In these cases, we should stick to the booking that would give a true representation. The booking could be supported be a reconciliation between grantor and grantee, in which both sides agree on the receivable.

Yours cordially, Frank



Dear Frank, 

I just wanted to discuss with you the unrestricted and restricted revenue recognition.  I went now through the law searching for the revenue recognition criteria and I think that Article 20 is very precise in defining how revenues can be recognized.

Article 20 of the mentioned law deals with revenues and in paragraph 1 it states: 

– recipročni prihodi (prihodi na temelju isporučenih dobara i usluga)priznaju u izvještajnom razdoblju na koje se odnose pod uvjetom da se mogu izmjeriti neovisno o naplati // Reciprocal revenues or (revenues arising from provided services or sold goods) are recognized in the reporting period to which they relate provided that they can be measured reliably regardless of their collection

– nerecipročni prihodi (donacije, članarine, pomoći, doprinosi i ostali slični prihodi) priznaju u izvještajnom razdoblju na koje se odnose pod uvjetom da su raspoloživi (naplaćeni) najkasnije do trenutka predočavanja financijskih izvještaja za isto razdoblje // Non-reciprocal revenues (donations, membership fees, supports, contributions and other similar revenues) are recognized in the reporting period provided that they are available (collected) at the latest at the time of submitting the financial statements for the reporting period. Basically, it means that you can recognize revenues, for example as at 31 Dec 2011, if they are not collected but they must be collected at the date when you are submitting the FS (for example 30 April 2012). Therefore, in case that grant revenues are not collected they cannot be recognized.

 So in my opinion the bookings that you are proposing should be amended in the step b) when dealing with the revenues – Debit receivable from donor  Credit revenue can only be made if donation is collected, if not, they stay off-balance sheet until the cash is received.

 What do you think?

 Best regards



Dear Boris, No, no, no! Doing so would be totally state-minded. I mean, we work here in the non-governmental sphere – the indicated treatment would be okay for budget organisations, but not for organisations of a true civil society. It is an indicator of civil society that people enter into agreements and may trust each other. It is not like this that we have only to accept state-paper as only valid commercial paper. And, let me say this: Sometimes a word of my neighbor has a higher value than some kind of state promises! Thus, because the regulation does not give a fair representation, we must ignore it.

 Yours cordially,




 Dear Frank

 I am sorry for not replying earlier but it is very busy these days with all reports that are going out.

 Anyway, I could not agree more with you on your argument that we should stick to the booking that would give a true representation, however, I was just pointing out what the current law says and this is just a confirmation of the fact that the law is very deficient in this respect. My point is that under current situation people who prepare FS for NGOs in Croatia and who in most of the cases do not take substance under the form will argue on the grounds that the law is specific and says that revenues from donors can be recognized only if collected.




 Dear Frank and Thomas,

 just to update you on the news in Croatia. It seems that our new Government is planning to change and introduce new law on accounting for non-profits. The thing is that people over here are quite unhappy about the fact that enormous amounts of money (7,4 billion HRK in period from 2006.-2010.) from the state budget are given to non-profits and nobody is checking how this money is spent.

 Best regards