Financial Reporting for Cooperative Societies

1. 1 Financial Reporting for Cooperative Societies

2. 2 COOPERATIVE MOVEMENT PHILOSOPHY

3. 3 Presentation flow What is a cooperative ? Statement of Cooperative identity and principles Cooperatives as SMEs Cooperatives and poverty Cooperatives-a significant part of the global economy Status of Cooperative Societies in Uganda as at 22nd May 2009

4. 4 Presentation flow Financial reporting for cooperative societies The purpose of the financial reports What to take care of in cooperative financial reports Preparation Appropriation of net surplus Challenges associated with financial reporting for cooperatives Way forward

5. 5 What is a co-operative? A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically controlled enterprise.

6. 6  Statement of Cooperative identity and principles Co-operatives are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility, and caring for others

7. 7 Cooperative Principles The co-operative principles are guidelines by which co-operatives put their values into practice. VOLUNTARY AND OPEN MEMBERSHIP Co-operatives are voluntary organisations, open to all persons able to use their services and willing to accept responsibilities of membership, without gender, social, racial, political, or religious discrimination.

8. 8 Cooperative Principles DEMOCRATIC MEMBER CONTROL Co-operatives are democratic organisations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership.

9. 9 Cooperative Principles In primary co-operatives members have equal voting rights (one member, one vote), and co-operatives at other levels are also organised in a democratic manner.

10. 10 Cooperative Principles MEMBER ECONOMIC PARTICIPATION Members contribute equitably to, and -democratically control, the capital of their co-operative. At least part of that capital is usually the common property of the co-operative. Members usually receive limited compensation, if any, on capital subscribed as

11. 11 Cooperative Principles a condition of membership. Members allocate surpluses for any of the following purposes: developing their co-operative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the co-operative; and supporting other activities approved by the membership.

12. 12 Cooperative Principles AUTONOMY AND INDEPENDENCE Co-operatives are autonomous, self-help organisations controlled by their members. If they enter into agreements with other organisations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their co-operative autonomy.

13. 13 Cooperative Principles EDUCATION, TRAINING AND INFORMATION Co-operatives provide education and training for their members, elected representatives, managers and employees so they can contribute effectively to the development of their co-operatives. They inform the general public – particularly young people and opinion leaders – about the nature and benefits of co-operation.

14. 14 Cooperative Principles CO-OPERATION AMONG CO-OPERATIVES Co-operatives serve their members most effectively and strengthen the Co-operative Movement by working together through local, national, regional and international structures.

15. 15 Cooperative Principles CONCERN FOR COMMUNITY Co-operatives work for the sustainable development of their communities through policies approved by their members.

16. 16 Cooperatives as SMEs In the context of the theme, cooperative enterprises range from small-scale to multi-million dollar businesses. Across the globe, co-operatives are estimated to employ more than 100 million women and men and have more than 800 million individual members. Because co-operatives are owned by those who use their services, their decisions balance the need for profitability with the wider interests of the community

17. 17 Cooperatives and poverty What can co-operatives do about poverty? The answer is: a lot. Co-operatives have a number of important roles to play in securing the rights and livelihoods of poor people: Co-operatives are schools for democracy, and require the development of citizenship skills to maximise their potential. Providing services the state cannot, or services captured by elites, where private provision

18. 18 contn is too costly or too difficult: health, education, utilities, credit, and agricultural extension services. These could be of enormous importance in helping to achieve the Millennium Development Goals. Business co-operation – small farmers and entrepreneurs co-operate to obtain production

19. 19 contn inputs, help with processing and marketing. This has the potential to enable small primary producers to combine and reach the critical mass to break into export markets. Capital accumulation, credit and savings – especially important for disadvantaged groups who do not have access to credit.

20. 20 Cooperatives-a significant part of the global economy Cooperative sector represents a significant contribution to our global economy. According to the ICA annual survey, Global 300, the top 300 cooperatives around the world had nearly $1 trillion in revenues in 2005.That is only slightly less than the economy of the world’s 9th largest economy, Canada.

21. 21 contn Cooperatives create over 100 million jobs ,more than all the multinational corporations combined. Cooperative enterprises also contribute to every sector of the economy and are among the largest businesses in the world(ICA,2008)

22. 22 Status of Cooperative Societies in Uganda as at 22nd May 2009

23. 23 Status of Cooperative Societies as at 22nd May 2009

24. 24 Status of Cooperative Societies as at 22nd May 2009

25. 25 Important information to note Cooperatives are member owned businesses ,their equity is provided by their members .A cooperative member will make an equity investment ,often nominal, in a cooperative upon becoming a member. This investment represents a member’s ownership interest in the cooperative.

26. 26 contn Members shares are recognised by members as risk capital because in the unfortunate incidence of a bankruptcy, member shares are used in making good of the loss if the cooperative society’s own funds (which are usually comprised of retained earnings ) cannot cover the losses.

27. 27 contn In Uganda there is no active market for cooperative shares .The member’s interest is generally not transferable and shares can only be exchanged with the cooperative it self. Unlike publicly held investor –owned entities, an individual or business typically can join a cooperative only after meeting the requirements for the membership and after approval of the board of directors, membership or in some cases the Registrar of CS

28. 28 contn Cooperatives have a variety of arrangements regarding the redemption of member’s shares or the refund of equity interest: in some countries cooperative boards have the unconditional right to refuse the redemption of the member’s shares, in other countries the cooperative has an obligation to redeem the member's shares or refund equity interest

29. 29 contn When a member decides to withdraw from the cooperative or when he is excluded from the cooperative. Some cooperatives repurchase the shares of members or refund the equity interest upon their withdraw from the cooperative, upon death, upon reaching retirement or a certain age. the redemption amount is generally the book value of the member’s shares.

30. 30 Financial reporting for a cooperative society Cooperative FINANCIAL Reporting refers to presenting financial data of a cooperative society’s position, operating performance and funds flow for a given accounting period. Financial statements along with related information may be contained in various forms for external party use such as in the AGM and other places

31. 31 contn Members elect the committee to manage and supervise the cooperatives on their behalf. It is there fore prudent ,that from time to time, the committee should report to the members about the performance the institution they were entrusted with. This is done through the AGMs when the committee presents to members the Cooperatives audited annual accounts, budgets, etc.

32. 32 contn Likewise, the committee hires management staff to manage the day to day operations of the cooperative society. It is therefore necessary that management should report to the committee on how the cooperative society they are managing is performing.

33. 33 contn In addition to the different reports that are to be furnished to the chairman and treasurer at different times, management must submit monthly operational and financial reports to the committee as per the agreed formats. Further more, there is always a need to find out how well the cooperative society

34. 34 contn has performed on its operations over any given time .This too calls for reports to be prepared and provided to who ever is in need .It is also a legal requirement that cooperatives prepare annual financial reports on their operations ,which should be audited by competent auditing firms.

35. 35 cont From the foregoing therefore, it is vital that cooperative societies develop systems ,which will enable them to produce timely and accurate reports that would be used in satisfying the requirements of different stakeholders. Though cooperative societies can prepare a range of reports, the following are a must

36. 36 contn Trial balance-a summary of all accounts that have balances at the end of the reporting time. It helps to check whether the double entry accounting of entries was properly done and whether there are no errors that may have been committed in the posting exercise.

37. 37 contn Income statement The purpose of the income statement is to measure how much income the cooperative society has earned during the given period of time ,the expenses it has incurred in generating income earned and the profits/surplus it has realised out of its operations. Income statement can be prepared on weekly, monthly, quarterly, half-yearly

38. 38 contn ,or annual basis depending on the ability and convenience of the management.

39. 39 INCOME STATEMENT OPERATING INCOME TOTAL OPERATING INCOME OPERATING EXPENSES Interest and fees expenses Loan loss provision expense personnel expense Other administrative expenses transportation Rent Utilities

40. 40 supplies depreciation Other operating expenses TOTAL OPERATING EXPENSES NET OPERATING PROFIT (LOSS) NON OPERATING INCOME Cash donations Other non operational income TOTAL NON OPERATIONAL INCOME

41. 41 TOTAL CONSOLIDATED PROFIT (LOSS)

42. 42 Balance sheet Like an income and expenditure statement, the balance sheet of a cooperative society can be prepared on a weekly, monthly, quarterly ,half –yearly, or annually depending on the capacity and convenience of management.

43. 43 ASSETS Cash and due from banks Reserves in central bank Shortterm investments Total loan portifolio (loan loss reserve) Net loans outstanding Fixed assets-property and equipment (accumulated depreciation)

44. 44 Net fixed assets TOTAL ASSETS LIABILITIES Savings account-forced Savings account-voluntary Loans from commercial banks Loans from subsidised sources TOTAL LIABILITIES

45. 45 EQUITY Paid-in equity from share holders Donated equity-prior years, cumulative Donated equity –current year Prior year retained earnings/losses Current year retained earnings/losses TOTAL EQUITY TOTAL LIABILITIES AND EQUITY

46. 46 contn Others include cash flow statement . Besides, the cooperatives should prepare as many operating reports as may be required to show how they are performing and meet the information requirements of their owners, supervisors and development partners. Such reports may include the following:

47. 47 cont The composition of members and their share capital contribution The composition of members with saving accounts and the amount of their saving deposits The loan portfolio ageing report The composition of the borrowers and the amounts they have borrowed and their repayment record.

48. 48 cont The society’s assets . The society should keep data and information that will enable them to generate the major operating reports with out a lot of difficulties.

49. 49 The purpose of the financial reports To provide members with an account of stewardship of the cooperative by the governing body and management, ensuring timely, understandable ,relevant ,reliable ,comparable and transparent information on the cooperative’s activities, performance and financial position.

50. 50 Why the need for financial reporting According to section 22 (1-7)Cooperative societies act cap 112, every registered cooperative society shall cause its accounts to be audited at least once in every year by an auditor appointed by the AGM and approved by the Registrar, and the cost of the audit shall be borne by the society ;except that-

51. 51 contn a) no auditor chosen by a registered society to audit its books shall perform that function for more than three annual audits in succession unless authorized by the registrar; 22(2)audits shall be conducted in accordance with the International Standards on Auditing (ISA).

52. 52 contn And, in addition ,include audit of management efficiency. 22(3)The auditor shall at all times have access to all books ,accounts ,papers and securities of a registered society, and every officer of the society shall furnish such information in regard to the transactions of the society as the auditor may require.

53. 53 contn 22(5)every auditor appointed under subsection(1) shall submit a detailed audit report of the accounts and balance sheet to the committee and a true copy of the accounts and balance sheet to the registrar 3 months after its financial year prepared in compliance with generally accepted professional audit standards and, in addition ,include the auditor’s opinion

54. 54 contn On whether or not the business administration of the society has been conducted- a) Efficiently b) in accordance with the Cooperative principles and the auditing and accounting provisions of this act; and c) in accordance with its objectives ,byelaws and any other decisions made by the AGM

55. 55 contn 22(7) where a registered society fails to cause its accounts to be audited in accordance with subsections (1),(2) &(5),the committee of that society shall be deemed to have relinquished its offices; and the registrar shall convene ASGM to elect anew committee unless the registrar is satisfied that the failure was due to circumstances beyond the committee’s control.

56. 56 cont Section 23: (1) no person ,not being a registrar or deputy or assistant registrar of cooperative societies shall be appointed/approved as an auditor for the audit of the accounts of a registered society unless that person, or in case of a firm, every partner of that firm, is a member of a recognised accounting body.

57. 57 What to take care of in cooperative financial reports Preparation Provide for 10% of net surplus/gain for statutory Reserves (Regulation 34.1) National cooperative education fund of 1% of the turn over of the society (sec.49) 5% of surplus should be reserved for share transfer funds (Regulation 43) 5% of surplus should be reserved for development /revolving fund( Regul.36.1)

58. 58 contn Provide for loan losses /non performing loans

59. 59 Appropriation of net surplus 60% patronage bonus 20%incentive bonus 10% dividends (Regulation 40) 10% development fund

60. 60 Challenges associated with financial reporting for cooperative societies The auditors do not acquaint them selves with the legal frame work governing cooperatives namely, the Cooperative Societies Act cap 112;Cooperative Societies Regulations 1992 and the respective cooperative societies' bye laws prior to undertaking auditing assignments in cooperative societies. E.g.

61. 61 contn Statement of managements’ responsibility “The directors are required to: Prepare the financial statements on the on going concern basis unless it is inappropriate to presume that the company will continue in business”

62. 62 contn Some public accountants are not registered with the registrar’s office and yet they provide audit services to the cooperatives

63. 63 contn Cooperative financial reporting provides only a partial picture to the member and so additional non- financial information is of high importance to report users (members especially) in understanding the activities and performance of a cooperative society.

64. 64 cont Holding of AGM should take place with in 60 days following the closure of the FY (Article 19 bye laws) but, auditors do delay audited accounts there by making the affected cooperative breach the law

65. 65 cont Some public accountants provide for 20% for dividends on shares and yet regulation 40 clearly states that “no registered society shall pay any annual dividend exceeding 10% on shares of the paid up capital”

66. 66 Way forward We there fore recommend for inclusion of non-financial content of reports in the annual or interim financial reports or separately. Expedite the audit assignments to enable cooperatives abide by their bye laws, the act and regulations Acquaint one self with the legal frame work underpinning the cooperatives

67. 67 contn Where one is not sure consult with the registrar of cooperative societies for guidance Include management letter in the accounts Take some time off to help the society’ management staff to develop accounting systems

68. 68 cont Submit a true copy of the accounts to the registrar 3months after the FY of the society (sect .22(5)

69. 69 Conclusion Cooperatives continue to be an important means often the only ones available where by the poor as well as those better off but at perpetual risk of becoming poor, have been able to achieve economic security and an acceptable standard of living and quality of life(ICA,1996). Hence it is imperative that they produce financial reports that provide timely, understandable ,relevant ,reliable ,

70. 70 Conclusion comparable and transparent information on the cooperative’s activities, performance and financial position.

71. 71 References AHIMBISIBWE,2007.The effects of SACCOS on members' saving culture. case study un published Dissertation for MBA to UMU ICA,2006.Proceedings of the 7th International Cooperative Alliance. Regional workshop on Cooperative Micro Finance .Nairobi: ICA

72. 72 References COUTURE, M-F. etal …,2002.Transition to Cooperative Entrepreneurship .GENEVA :ILO MFI Performance Monitoring Tool ,2007.User guide. Kampala: Rural Speed ,USAID SMITH,S.,2004.Promoting Cooperatives, A guide to ILO Recommendation 193 . Manchester ,UK :The Cooperative College

73. 73 References SULEMAN A.CHAMBO etal …2007.Analysis of the socio economic impact of Cooperatives in Africa and their institutional context. Nairobi :ICA&CCA The Cooperative Societies Act Cap 112 (Laws of Uganda).Kampala:GOU The Cooperative Societies Regulations 1992.Kampala:GOU

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