Quick Guide to Understanding Financial Statements
Background
The First Nations Financial Transparency Act (Bill C-27) addresses the issue of financial transparency for First Nation leaders by expanding the scope of the information to be publicly disclosed beyond the salaries and expenses of chiefs and councillors to include the public disclosure of a First Nation's audited consolidated Financial Statements.
Community members, the general public and even AANDC personnel would benefit from an increased level of literacy in being able to read, interpret and act (based on their own interests and perspectives) on the Financial Statements issued by First Nations. At the same time, there is a wide range of financial literacy – from beginners who may never have seen a financial statement, to highly sophisticated investors.
Table of contents
- What are Financial Statements and Why are they audited each year?
- Why should I care about my First Nation's Financial Statements?
- What are the pieces that make up the Financial Statements?
- Why do they call the Financial Statements "consolidated" and "audited"?
- How do I know if the Financial Statements are accurate?
- What do the Financial Statements tell me about the financial situation of my First Nation?
- Where in the Financial Statements do I find out whether my First Nation has a deficit or a surplus?
- What does the accumulated surplus/ deficit number mean?
- What is "net debt" and why is it important? Do we have to pay debt back?
- Does an annual surplus mean that my First Nation has money to spend?
- What information does the cash flow statement provide?
- Where do I find out how much the Chief and Council members are paid?
- Why are notes added to the Financial Statements?
- What "story" are the Financial Statements telling me about my First Nation?
- Who should I ask about any specific questions I have?
Q: What are Financial Statements and why are they audited each year?
Answer:
Financial Statements give you a picture of a First Nation's finances over a one year period referred to as a "fiscal year". Basically, they show you where the First Nation's money came from, where it went, and where it is at the end of the fiscal year.
Having the statements audited each year by an independent, external auditor, provides the reader with an assurance that the statements paint a reasonable and reliable picture of the First Nation's finances.
You should also know that the fiscal year for a First Nation starts on April 1 and ends on March 31 of the following year.
Q: Why should I care about my First Nation's Financial Statements?
Answer:
If you are a member of a First Nation community, services that you receive depend on money being available to pay for those services. Financial statements tell you not just how money was spent, but also how likely it is that money will be available to pay for services in the future. The healthier its finances, the more likely it is that your First Nation will have the money to pay for future services.
By taking an interest in the finances of your community you will contribute to its efforts to maintain and improve its financial health and, therefore, its ability to continue to provide services to its members.
Q: What are the pieces that make up the Financial Statements?
Answer:
There are eight separate pieces that make up the Financial Statements package:
- Statement of Responsibility
- Auditor's Report
- Consolidated Statement of Financial Position
- Consolidated Statement of Operations
- Consolidated Statement of Change in Net Debt
- Consolidated Statement of Cash Flows
- Notes
- Schedules
There are four Financial Statements (Numbers 3, 4, 5, and 6 above). Each one speaks to essential aspects of the financial position of the First Nation.
Notes (Number 7 above) are an important part of the Financial Statements and provides clarifications or more detailed information about what you see in the four statements.
Additional information, like salaries for Chief and Council members, is included in the Schedules (Number 8 above).
Q: Why do they call the Financial Statements "consolidated" and "audited"?
Answer:
"Consolidated" means that the statements show money received and spent not just by the First Nation to provide services to members, but also by all of the First Nation-owned businesses. Consolidated Statements would also include not-for-profits owned or controlled by the reporting entity (or First Nation).
Businesses owned or controlled by the First Nation would be included in the financial statements and the details of the operation of the owned corporate entities would be highly summarized.
"Audited" means that a qualified, external and independent auditor has looked closely at the statements and given a professional opinion about how reasonable and reliable they are.
Q: How do I know if the Financial Statements are accurate?
Answer:
The opinion of the Auditor is included in the "Auditor's Report," which is one of the components of the Financial Statements.
An "unqualified opinion" means that no material misstatements have been identified by the auditor in the financial statements. The opinion shown here is what is an "unqualified" opinion – meaning that the auditors believe the statements to be both reasonable and reliable.
An opinion that is not "unqualified" indicates that there may be some problems, from relatively minor (where the opinion is qualified) to potentially major (where the auditor provides an adverse opinion.) You may wish to pose questions to your First Nation financial administrator where you see an opinion that is not "unqualified."
Q: What do the Financial Statements tell me about the financial situation of my First Nation?
Answer:
The Consolidated Statement of Operations tells the reader if the First Nation was able to cover its costs during the fiscal year.
The Consolidated Statement of Change in Net Debt tells the reader if the First Nation was able to reduce its net debt during the fiscal year. "Net debt" is the negative amount left over after all that the First Nation owes (its financial "liabilities") is subtracted from its total financial assets (e.g. cash).
The Consolidated Statement of Cash Flows tells the reader if the First Nation was able to increase its cash flow during the fiscal year.
The Consolidated Statement of Financial Position tells the reader if the First Nation will be able to provide future services to members.
Q: Where in the Financial Statements do I find out whether my First Nation has a deficit or a surplus?
Answer:
View text version of this image
Illustrated here is the Consolidated Statement of Operations of the fictional ABC First Nation which itemises in details various Revenues, Expenses, as well as the community's Annual Surplus (deficit), Accumulated surplus (deficit) at the beginning of year and the Accumulated surplus at the end of the year. Highlighted by a red frame is the line detailing the Annual surplus (deficit).
Not unlike a regular household, a First Nation needs to cover their expenses with monies coming in ("revenues"). Otherwise, they will have to cut services or costs, or borrow and incur more debt. More debt creates more future obligations, which eventually leaves less money to pay for delivery of services to members. An annual surplus (or annual deficit) in the Statement of Operations shows whether or not the revenues for the year were enough to cover the expenses for the year. An annual surplus indicates that the First Nation was able to cover its expenses during the fiscal year. For obvious reasons, an annual deficit may be a reason for some concern, which you may wish to take up with your First Nation management.
Q: What does the accumulated surplus/deficit number mean?
Answer:
View text version of this image
Pictured is the Consolidated Statement of Financial Position of the fictional ABC First Nation. Highlighted on the statement by a red frame is the line identifying Accumulated Surplus (deficit).
Assets are things that the First Nation owns that have value, like cash ("financial assets") or buildings ("non-financial assets") and can readily be used to cover future needs. The Statement of Financial Position tells you what assets the First Nation owns after what it owes has been subtracted. These are known as the "net assets" or "accumulated surplus". If this amount is negative – meaning that what the First Nation owes is more than the assets it has – this is known as the "accumulated deficit". The bigger this negative number, the more worrisome it is for the future ability of the First Nation to provide services to members because moneys from provision of services will need to be diverted to cover these accumulated deficits, or additional revenue will need to be generated.
Q: What is "net debt" and why is it important? Do we have to pay debt back?
Answer:
View text version of this image
Pictured is the Consolidated Statement of Financial Position of the fictional ABC First Nation. Highlighted on the statement by a red frame is the line identifying Employee benefit obligations.
In the Statement of Financial Position, "net debt" is the negative amount left over after all that the First Nation owes (its financial "liabilities") are subtracted from its total financial assets (like cash). A large net debt for the year is a considerable cause for concern because it shows that the First Nation is unable cover its expenses.
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Pictured is the Consolidated Statement of Change in Net Financial Assets (Net Debt) of the fictional ABC First Nation. Highlighted on the statement by a red frame is the line identifying the Change in net financial assets (net debt).
At the same time, the change in net debt in the Statement of Change in Net Debt measures whether or not there has been an increase or decrease in the First Nation's net debt during the fiscal year. An increase in net debt may be a reason for concern.
Eventually, all debts will have to be paid back, and doing so will use money which would otherwise help provide more services to members. More debt today will force us to tighten our belt in the future…
Q: Does an annual surplus mean that my First Nation has money to spend?
Answer:
View text version of this image
Pictured is the Consolidated Statement of Operations for the fictional ABC First Nation. Highlighted on the statement by a red frame are the three lines identifying the Annual surplus (deficit), the Accumulated surplus (deficit) at beginning of yearand the Accumulated surplus at end of year.
A positive accumulated surplus at the end of year in the Statement of Operations indicates that the First Nation has money left over. An "annual surplus" only shows that the revenues for the year were higher than the costs for the year, meaning that your First Nation was able to cover its costs during the fiscal year. But does that automatically mean that the First Nation now has money to spend? Not necessarily. If, for instance, the accumulated deficit at the beginning of the year exceeded this annual surplus, there will be no accumulated surplus left at the end of the year.
Q: What information does the cash flow statement provide?
Answer:
View text version of this image
Pictured is the Consolidated Statement of Cash Flows for the fictional ABC First Nation. Highlighted on the statement by a red frame are the three lines identifying the Increase (decrease) in cash and cash equivalents, Cash and cash equivalents at beginning of year, and Cash and cash equivalents at end of year.
The cash flow statement indicates whether the First Nation was able to increase its cash flow during the fiscal year. Cash – "liquid" money – is the lifeblood of any First Nation or First Nation-owned business. Availability of cash (or "positive cash flow") allows the organization to pay for goods, services and salaries without going into debt or dipping into its savings. Cash flow information, shown in the Statement of Cash Flows, shows the change in the amount of cash held from the beginning of the year to the end of the year. An increase in cash flow is a sign of good financial health; a decrease is a reason for asking questions.
Q: Where do I find how much the Chief and Council members are paid?
Answer:
View text version of this image
Pictured is the Schedule of Remunerations and Expenses for the fictional ABC First Nation. Highlighted on the statement by a red frame are the lines identifying the elected officials and the financial information regarding Salary, Travel, Vehicle, Honouraria, Severance, Other Remuneration, and their sum totals.
Starting with the fiscal year ended March 31, 2014, an annual Schedule of Remuneration and Expenses should be included among the schedules attached to the Financial Statements. It indicates what the First Nation has paid the Chief and each of its Councillors for their services during the year, broken down by type of payment.
Q: Why are notes added to the Financial Statements?
Answer:
Notes are very important in understanding the Financial Statements because they clarify or provide useful context for the numbers in the Statements.
As a minimum, the notes explain the accounting policies used in the preparation of the Statements.
In most cases, however, notes have a lot more to say and should be looked at carefully.
View text version of this image
Pictured is the Notes to Consolidated Financial Statements document for the fictional ABC First Nation. The image is of the top of the Statement which begins with section 1. Summary of Significant Accounting Policies and 2. Cash and cash equivalents. The document is a combination of text and two columns of financial data for the years 2013 and 2012.
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Pictured is the Notes to Consolidated Financial Statements document for the fictional ABC First Nation. The image is of section 20. Segment Disclosure and features some text and a large table of financial data.
Some notes will be included because of certain developments (for example, debt obligations that come due.)
Finally, some notes will be disclosed to give useful insights to readers of the statements (for example, they want to bring attention to positive signs for the Community's economic prospects.)
Q: What "story" are the Financial Statements telling me about my First Nation?
Answer:
Consolidated Statement of Change in Net Debt
Was your First Nation able to reduce its net debt during the fiscal year?
"Net debt" is the negative amount left over after all that the First Nation owes (its financial "liabilities") are subtracted from its total financial assets (like cash). Change in net debt in the Statement of Change in Net Debt measures whether or not there has been in increase or decrease in the First Nation's "net debt" during the fiscal year. An increase in net debt may be reason for concern.
Consolidated Statement of Operations
Was your First Nation able to cover its costs during the fiscal year?
A First Nation needs to cover its costs with monies coming in (revenues). Otherwise, it will have to cut services, costs, borrow and incur more debt or find additional new revenues. More debt creates more future obligations , which leaves less money to pay for delivery of services to members. Annual surplus (or annual deficit) in the Statement of Operations shows whether or not the revenues for the year were enough to cover the costs for the year. An annual deficit may be reason for concern.
Consolidated Statement of Cash Flows
Was your First Nation able to increase its cash flow during the fiscal year?
Availability of cash - "liquid" money (or "positive cash flow") enables the organization to pay for goods, services and salaries without going into debt. Cash flow information, shown in the Statement of Cash Flows, indicates the change in the amount of cash held from the beginning of the year to the end of the year. An increase in cash flow is a sign of good financial health; a decrease is a reason for asking questions.
Consolidated Statement of Financial Position
How able will your First Nation be to provide future services to its members?
Assets are things that the First Nation owns that have value, like cash ("financial assets") or buildings ("non-financial assets") and can be used to cover future needs. The Statement of Financial Position tells you what assets the First Nation owns clear of all that it owes. These are known as the "net assets" or "accumulated surplus". If this amount is negative – meaning that what the First Nation owes is more than the assets it has – this is known as the "accumulated deficit". The bigger this negative number, the more worrisome it is for the future.
Q: Who should I ask about any specific questions I have?
Answer:
Your community's financial administrators would be your first point of contact for questions, details and specifics about any information in your First Nation's Financial Statements.
For questions of a more general nature – or if you are uncertain about notions, concepts or terminology used – you have at least three approaches available.
One approach is to ask your community's financial administrators. They were the ones who prepared the statements in the first place.
Another approach is the internet. A lot of useful information is available by using an internet search engine.
Finally, another approach is to call us at 1-800-567-9604. We will try to answer all questions as soon as possible. Using your questions we may also update – or add to – this guide to make it ever more current and responsive to your needs.