Accounting at a Liechtenstein charitable foundation
Does a charitable foundation in the Principality of Liechtenstein have to or should it keep accounts? And if so, how should it be structured? What information should it contain? These are precisely the questions that the Association of Liechtenstein Charitable Foundations and Trusts (VLGST) already addressed in 2018. In January 2019, it adopted a corresponding recommendation on accounting for charitable foundations and other charitable institutions in Liechtenstein.
In principle, there is no obligation to keep accounts for foundations in the Principality of Liechtenstein, as they generally do not operate a commercial business. Article 1045, paragraph 3 PGR only stipulates that, taking into account the principles of proper bookkeeping, records must be kept that are appropriate to the assets and liabilities and that receipts must be retained. The foundation council should, however, keep accounts and prepare annual financial statements both in its own interest and for stakeholders such as beneficial owners/beneficiaries, banks and other creditors, tax offices and other authorities as well as other third parties.
Better informative value and comparability
Against this background, the Association of Liechtenstein Charitable Foundations and Trusts (VLGST) has determined that Liechtenstein lacks a standard for the accounting of charitable foundations and organisations. At the same time, uniform accounting according to a recognised standard is required by law in most countries today, which is covered by Swiss GAAP FER in Switzerland, for example. In cooperation with the Liechtenstein Association of Auditors, a recommendation was therefore drawn up that is based on the standard applicable in Switzerland, but takes greater account of the circumstances of Liechtenstein charitable foundations. The "Recommendation on Accounting for Charitable Foundations and Other Charitable Institutions in Liechtenstein" was adopted by the Board of the VLGST on 22 January 2019 and recommended for application from 1 January 2020. With this recommendation, the VLGST aims to increase the informative value and comparability of the annual financial statements and reporting. A key feature of these recommendations is the addition of a statement of changes in capital and an activity report to the annual financial statements, which takes account of their specific nature.
Non-profit or charitable purposes
Non-profit foundations and other non-profit institutions are organisations that pursue non-profit or charitable purposes, the fulfilment of which promotes the general public, irrespective of their legal form. The promotion of the general public is understood to mean that the activity is carried out for the common good in a charitable, religious, humanitarian, scientific, cultural, moral, social, sporting or ecological field. The activity can also only benefit a certain group of people. It is important to note that the circle of beneficiaries is usually different from the circle of service providers (donors, benefactors, patrons). The non-profit status must be pursued exclusively and irrevocably, which is laid down in the statutes.
Basis and principles of the annual financial statements
If a foundation or similar agrees to the recommendations, it must prepare annual accounts in accordance with the recommendation within nine months at the end of the business year. Any freely convertible currency may be chosen. The annual financial statement must give a true and fair view of the assets, financial and income situation. In doing so, the principles of proper accounting and reporting must be followed: going concern as well as materiality.
Expenses and income must always be accrued (accrual basis). Small organisations may also recognise expenses and income according to the cash flow (cash basis), but must disclose this in the notes. Charitable foundations and other charitable institutions are considered small organisations if they do not exceed two of the following figures on two consecutive balance sheet dates:
- Balance sheet total of ten million Swiss francs or the equivalent in a foreign currency
- Five paid full-time positions on average during the financial year
- Annual distributions of more than three million Swiss francs or the equivalent in a foreign currency
The principles of proper accounting and reporting for the annual financial statements are completeness, clarity and prudence, consistency in presentation, disclosure and valuation as well as the gross principle (offsetting prohibition). If there is a deviation from the principle of consistency in presentation, disclosure and valuation, this must be explained in the notes to the individual financial statements.
The principle of individual valuation applies to assets and liabilities. The valuation bases and principles applied are to be disclosed in the notes. Expenses and income shall be presented gross in the income statement or in the notes. Both in the individual financial statement and in the consolidated financial statement, the figures of the previous year are to be stated. Furthermore, the general consolidation rules apply in accordance with the Liechtenstein Persons and Companies Act (PGR).
Easier assessment of the asset, financial and earnings situation
It is easy to see that the bases and principles of the annual financial statements described above correspond to Article 1065 ff. PGR or at least derived from them. This also applies to the five components of the annual financial statements, namely the balance sheet, the income statement, the statement of changes in capital, the notes and the activity report, as well as to the structure of the balance sheet.
- Due to the special nature of non-profit institutions, the balance sheet should divide the liabilities into equity, fund capital and liabilities in order to simplify the assessment of the asset, financial and income situation by third parties.
- The profit and loss account may be structured according to the cost of sales method or according to types of profit and loss. In this case, contributions and grants paid, personnel expenses and depreciation shall be shown separately in the notes for reasons of transparency.
- The statement of changes in capital shall show the gross balances and changes in the items of fund capital and restricted equity. The purpose of the various items must be stated. In addition, distributions must be shown and justified individually either in the statement of changes in capital or in the notes.
- The appendix contains the accounting principles already described above, the explanations of the items of the balance sheet and income statement, the statement of changes in capital as well as further information in accordance with the regulations of the PGR or the recommendation of the VLGST. The notes are designed for full transparency. Everything that is not apparent in detail from the balance sheet or income statement must be listed in the notes. For example, the market value of financial assets, administrative expenses as well as fundraising and general advertising expenses, each including personnel expenses. Gratuitous donations of goods and services must also be disclosed. In addition, the total amount of all remuneration paid to the foundation board and the management must be disclosed. And last but not least, all transactions and resulting credit balances and/or obligations towards related, legally independent organisations and persons.
- The activity report shall describe the purpose and objectives of the non-profit institution as well as the services rendered during the reporting period. It should also contain information on the members of the highest governance body and the executive board, the number of full-time positions as well as connections to related organisations. Furthermore, it is recommended to include information on the achievement of objectives or an assessment thereof, meaningful key figures and comparisons with regard to impact and profitability, statements on risks and challenges to which the organisation is exposed, and any measures taken.
The valuation guidelines applied in the annual financial statements ensure the uniformity and consistency of the valuation. In this context, the valuation of the items included in the balance sheet is based on the historical acquisition or production costs and on the current values, whereby valuation must always be based on the principle of prudence. Deviations from the valuation principles applied in the previous year must be stated and justified in the notes.
Special mention should be made of the valuation of securities held as current assets (e.g. listed and daily traded shares). These are to be valued at current values (market value). In the absence of such a value, they are to be valued at the most at the acquisition value less any value impairments (lower of cost or market principle). The latter also applies to financial assets. If, on the other hand, they are shown in the balance sheet at current values, the changes in value are to be shown either in the result for the period or via a separate fluctuation reserve in the shareholders' equity. Fixed assets are always reported at acquisition or production cost, less the necessary depreciation, which is carried out on a scheduled basis (in proportion to time or performance). Receivables and liabilities are to be shown nominally, also taking into account any impairment.
Provisions are legal or constructive obligations and must be measured at each balance sheet date on the basis of the probable cash outflows.
The VLGST recommendation also contains specifications for investment policy and investment restrictions. These will not be discussed in more detail here.
In the spirit of exemplary transparency, which is also necessary today, the Recommendation on Accounting for Charitable Foundations and Other Charitable Institutions in Liechtenstein has been developed as a modern and important tool for the preparation of annual financial statements. The recommendation deliberately goes beyond the legal framework according to PGR, which applies for example to public limited companies, in order to increase the informative value and comparability. It is to be hoped that these recommendations will be increasingly applied so that a living Liechtenstein standard will prevail which will also be observed internationally.