an initiative of FMSF & CPA

       
 

LOAN FROM DOMESTIC AND OTHER SOURCES

In an ongoing project, at times, if the receipt of foreign fund gets delayed, then an organisation may have to borrow from local sources (internal as well as external) to continue the project. It is understandable for an organisation to face such circumstances and there is no specific bar against such transaction under FCRA. However, in this context the following may be noted:

(i) If funds from local sources are used for FC projects, then they cannot be reflected in the FC books of account as FCRA 2010 requires reporting of only foreign contribution received and utilised. Even if some funds are used for FC project, such funds do not constitute foreign contribution. In other words, local funds used for FC projects are to be considered as local funds only.

(ii) A loan from domestic sources is not a receipt from foreign source. Therefore, it should not be received in the designated bank account. The expenditure can be directly made from the domestic bank account and booked as expenditure in the local books of account. Such expenditure should not be reported in the FC-4 statement as it strictly requires to report only foreign contribution received and utilised during the year. However, for donor reporting purposes such expenditure may be shown in the utilisation statement which is a special purpose report.

(iii) When the funds are received from foreign sources, the liability can be repaid to the external source such as bank or some other lender, directly from the FC designated bank account. Under tax law any repayment of loan against charitable expenses of earlier years is also treated as valid utilisation.

(iv) If the loan has been internally taken from a domestic account or general fund, then no entry or transfer would be necessary. For example, if a domestic general fund was used for FCRA project, then when the money is received it automatically becomes a part of the unspent balance if no expenditure is made. In other words the domestic general fund will be converted into FC general fund. It is not permissible to transfer FC funds internally to a domestic account, as mixing of FC fund with local fund is not permissible.

(v) It is reiterated that loan taken from domestic sources (whether internal or external) should not be reflected in FC-4 return. In this context, it needs to be understood that FC-4 return requires only the analysis of receipt and utilisation of foreign contribution. Any loan from domestic sources is apparently not a foreign contribution. Therefore, it should not be reflected in any FC books or statement.

ILLUSTRATION

For example, an organisation receives 1,00,000.00 in the year 2001- 02 from foreign sources. It spends 1,50,000.00 on FC projects. It borrows 50,000.00 from domestic sources. In the year 2002-03, it receives 1,00,000.00 from foreign sources. It spends ` 50,000.00 on FC projects and repays ` 50,000.00 to domestic account.

In the above case, in the year 2001-02, the organisation’s FC books of account should show only ` 1,00,000.00 as application of funds. ` 50,000.00 should be shown as application in the local books of account. In the FC Annual returns, only ` 1,00,000.00 should be shown as foreign receipts and application to the extent of ` 1,00,000.00 only since Form FC-4 requires a summary of the FC receipts and utilisation of those receipts. ` 50,000.00 may have been utilised for a FC project but it is not an utilisation of FC receipts. However, the utilisation statement sent to the donor may show 1,50,000.00 as application of fund, the auditor may put a footnote that ` 50,000.00 were spent in the local books of account.

In the year 2002-03, ` 1,00,000.00 should be shown as foreign receipts ` 50,000.00 should be shown as utilisation and remaining ` 50,000.00 should be repaid if the loan was taken from external sources. If the loan was generated internally, then no transaction or transfer is necessary since it will automatically increase the FC closing balance and become a part of the FC general fund. This money cannot be transferred to the local books and be treated as domestic general fund. In FC Annual returns statement ` 1,00,000.00 should be shown as utilisation if the loan is from external sources and ` 50,000.00 should be shown as utilisation if the loan is from internal sources.

The above illustration may raise some confusion regarding non-reflection of ` 50,000.00 as utilisation in the FC-4 return in the year 2001-02. It is clarified that FC-4 is not a statement to be prepared on accounting principles, rather it is a statement declaring certain specific facts as per the requirement of FCRA. The requirement is specifically to mention inflow and utilisation of foreign contribution in a particular year. Therefore, the expenditure of ` 50,000.00 from domestic sources should not be considered for FC-6 purposes till the foreign funds are received against it. Suppose, the organisation does not receive any foreign funds in future, then such reflection would not be correct. Therefore, any expenditure on expectation of a future receipt cannot be considered as an application of foreign funds because it is contingent upon a future event.

RECAPITULATION

To sum up the discussions :

(i) An organisation may use funds from domestic sources for FC projects.

(ii) A loan from domestic sources is not a receipt from foreign source. Therefore, it should not be received in the designated bank account. The expenditure can be directly made from the domestic bank account and booked as expenditure in the local books of accounts and should be shown as utilised in local books only. It should not be reported in FC. However, only for the purposes of reporting to the donor, such expenditure can be included in the utilisation statement. The auditor may put a footnote that certain amount was spent in the local books of account.

(iii) When the funds are received from foreign sources, the liability can be repaid directly to designated bank account if it is external. No transfer or transaction is necessary if the loan was taken from internal sources/general fund.

(iv) Any loan from domestic sources is apparently not a foreign contribution. Therefore, it should not be reflected in Form FC-4, or the FC Receipt and Payment Account or even in the FC books of account.