1. INCOME STATEMENT
The Income Statement is also known as the profit and loss statement. It summarizes all financial activity during a specific period of time, usually a month, quarter or year. It records income that was received and expenses incurred during the period. The bottom line of an Income Statement is the net income (or net profit or surplus) for the period.
Please note that microfinance institutions should record grant income below this line on the Income Statement. The terms revenue and income are frequently used interchangeably as are the terms income and profit. For the sake of consistency, this document refers to all gross proceeds as income, such as interest and fee income and all net proceeds as net income,such as “net income from operations”.
Please note: it is critical to the proper calculation of reports that the data entered in the Income Statement reflects only the values and amounts incurred during the accounting period (e.g. month or quarter), and does not represent a summary of the income and expenses incurred from the beginning of the financial year to the current accounting period.
Income
Interest income from loans:
Interest received on loans. Some MFIs record interest income on an accrual basis while others record interest income only when received (cash-basis). This should be described in the notes to the financial statements. If an MFI records interest on an accrual basis, this should generally stop if the loan becomes non-performing. Some MFIs capitalize (record on the Balance Sheet) interest income once a loan becomes non-performing resulting in a larger outstanding loan balance. This, too, should be described in the notes to the financial statements.
Fee income from loans:
Fees and commissions, including penalty fees (if applicable) received on loans.
Income from investments:
Revenue from interest, dividends or other payments generated by financial assets other than the loan portfolio, such as interest-bearing deposits, certificates of deposits and treasury obligations. This includes not only interest received in cash, but also interest accrued but not yet received.
Other operating income:
Revenue generated from other financial services, such as fees and commissions for non-credit
financial services. This item may include revenues linked with lending such as membership fees, ATM card fees, transfer fees, or other financial services such as payment services or insurance. If the MFI views training as an integral element of the financial service it provides, then training fees would be included in Other operating income. This figure should not include revenue earned on activities not related to the provision of financial services.
Total operating income:
Summation of all Operating income during the period or year to- date. (Y01 + Y02 + Y03 + Y04).
Financing Expenses
Interest and fees paid on market debt:
Total amount of interest and fees paid during the period on funds borrowed at a commercial (or market) interest rate from e.g. banks.
Interest and fees paid on subsidized debt:
Total amount of interest and fees paid during the period on funds borrowed at a lower than market interest rate. This could e.g. be donor funds or funds from other government agencies supporting MFIs.
Interest paid on voluntary savings:
Total amount of interest paid during the period on voluntary saving accounts.
Interest paid on compulsory savings:
Total amount of interest paid during the period on compulsory saving accounts.
Y08 Interest paid on time deposits:
Total amount of interest paid during the period on time deposit accounts.
Y09 Dividends paid on member shares:
Total amount of interest/dividends paid during the period on member shares.
Y10 Total financing expenses:
Summation of all financing expenses during the period or year to-date. (Y06 + Y07 + Y08 + Y09)
Y11 Gross financial margin:
Reflects the difference between what is earned by the MFI by providing financial services and its financing costs associated with its financial activities. It therefore reflects how well the MFI
is performing in terms of generating a sufficient ‘spread’. It is the difference between Total operating revenue and Total financing expenses. (Y05 - Y10)
Y12 Provision for loan losses:
A non-cash expense that creates or increases the Loan loss reserve (B05) on the Balance Sheet. This expense may be comprised of general and specific provisions. The general provision is calculated as a percentage of the value of the Gross loan portfolio that is at risk of default, based on ageing analysis. Specific provisions are made for specific loans. It is common to use the term Provision for loan losses and Loan loss reserve interchangeably. To avoid confusion between this expense and the Loan loss reserve, analysts prefer to use the termreserve for the Balance Sheet account, and the term provision for the expense account. It is also helpful to include the word expense when referring to this latter account. (See Loan loss reserve (B05) on the Balance Sheet). The Provision for loan loss expense should always be separated from other operating costs.
Y13 Net financial margin:
Represents the difference between the income generated from the portfolio and other investments, and the costs directly associated with those investments during the period (Financing expenses and Provision for loan losses). This represents the amount of income available to cover operating expenses for the period or year-to-date. (Y11 - Y12).
Operating Expenses
Y14a Personnel expenses:
Includes staff salaries,bonuses, and benefits, as well as employmenttaxes paid by the institution. It is also referredto as salaries and benefits or staff expense. Itmay also include costs of recruitment andinitial orientation. It does not include on-goingor specialized training costs, which areconsidered Other operating expenses (Y17).
Y14b Governance costs:
This includes all expenses associated with governance by the board of directors and the AGM: Board sitting allowances, reimbursements of expenses incurred by board members for e.g. transport, facilitation for activities of board members, board committee meetings, expenses for
holding the AGM.
Y15a Rent and utilities (administrative expenses):
Expenses incurred by theinstitution for the lease of land and/orbuildings during period and utilities such aselectricity, water and telephone bills.
Y15b Travel and transport (administrative expenses):
Any money paid fortransportation, room and board, facilitation,allowances, etc. of staff members while onofficial duties for the institution.
Y15c Stationery and office supplies (administrative expenses):
All money spentduring the period on any kind of expendableoffice items such as paper, writing pads, flipcharts, toner, ink, file folders, envelopes,tapes, staplers, pens, books, etc.
Y16 Depreciation:
A non-cash expense that is determined by estimating the useful life of each asset and expensing a portion of the useful life for the period. Depreciation represents a decrease in the value of property/assets and accounts for the portion of useful lifetime that is expensed during each accounting period. (Accumulated depreciation (B11) on the Balance Sheet)
Y17 Other operating costs:
Other operational costs not included in Y14 or Y15.
Y18 Total operating expenses:
Includes all personnel and administrative expenses, depreciation, and other operational expenses during the period, but excludes all Financing expenses and Provision for loan losses during the period. It does not include expenses linked to non-financial services that do not form an integral part of providing financial services. (Y14 + Y15 + Y16 + Y17)
Profit / (Loss)
Y19 Total expenses:
Summation of all Financing expenses, Loan loss provision and Operating expenses for the period or year-to-date. (Y10 + Y12 + Y18)
Y20 Net income from operations:
Total operating income less Total expenses. (Y05 - Y21)
Y21 Income from non-financial services:
Income received from non-financial services which are not an integral part of offering financial services.
Y22 Expenses from non-financial services:
Expenses that an institution incurs for providing non-financial services.
Y23 Net income from non-financial services:
Represents the contribution to net income from non-financial services. (Y21 - Y22)
Y24 Income taxes:
Includes all taxes paid on net income or other measures of profits as defined by local tax authorities. This item may also include any revenue tax. It excludes taxes related to employment of personnel, financial transactions, fixed-assets purchase or other value-added taxes (which should be included in operating expenses).
Note: As far as applicable, computation of income tax should be based on Net income from operations and Net income from non-financial income.
Y25 Net income after taxes and before grants:
Profit/loss less taxes, if any (Y20 + Y23 – Y24). Please note that it is this amount which is to be included under the Balance Sheet item Retained surplus/deficit current year (B35).
Y26 Grant income for loan capital:
(for memorandum purposes only): Funds donated to the MFI to capitalize the loan fund, that is, which are restricted to use as lending funds and cannot be used for operating expenses. This amount is recorded on the Income Statement for memorandum purposes only and is not included in the Retained surplus/deficit current year (B35).
Y27 Grant income for operations:
(for memorandum purposes only): Funds donated to the MFI to cover operating expenses and supplement earned income. This amount is recorded on the Income Statement for memorandum purposes only and is not included in the Retained surplus/deficit current year (B35).
Y28 Total grants received:
The summation of all grant income to support the delivery of financial services and non-financial services if applicable (Y26 + Y27). This item is transferred to the Balance Sheet item Donated equity (B33).
Y29 Net income after taxes and grants (for the period):
Summation of Net income after taxesand Total grants received. (Y25 + Y28). Thisitem is computed for memorandum purposesonly and is not to be included on the BalanceSheet as such. Net income after taxes andbefore grants (Y25) is the amount to betransferred to the Balance Sheet.