Last week, accountants were on their feet celebrating transparency and accountability at ICPAU’s annual FiRe Awards ceremony. That’s the Institute of Certified Public Accountants of Uganda Financial Reporting Awards. They were looking for sets of financial statements that:
- Provide a balanced and reasonable picture of the organisation’s economic, environmental, and social performance;
- Facilitate comparability, benchmarking and assessment of performance; and
- Address issues of concern to stakeholders.
One of the important evaluation criteria was compliance with an applicable Financial Reporting Framework. But for the Non Profit Organisations (NPOs) there is no such internationally applicable framework, so the preparers, auditors and judges were necessarily open minded and creative. The audit opinion for RHU mentions ‘IPPF and RHU guidelines and regulations’ as the framework, while Child’s i Foundation cites the ‘Companion Guide to IFRS for SMEs for Non Profit Organisations’.
It really is shocking that in 2019 no internationally recognised framework exists to guide NPOs in how to prepare their general purpose financial statements, yet the ‘annual audited accounts’ are a key part of the due diligence processes that facilitate the flow of funds from grantors to grantees, and enable accountability to local stakeholders.
International Financial Reporting Standards (IFRS) do not specifically cover issues unique to not-for-profit organisations. The Preface states that “although IFRS are not designed to apply to not-for-profit activities in the private sector, public sector or government, entities with such activities may find them appropriate”. International Accounting Standard (IAS) 1, provides that “Non-profit, government and other public-sector enterprises seeking to apply this standard may need to amend the descriptions used for certain line items in the financial statements and for the financial statements themselves”.
Fortunately, that is soon to change. The IFR4NPO (International Financial Reporting for Non Profit Organisations) Project, an initiative by partners Humentum and CIPFA (Chartered Institute of Public Finance and Accountancy), is developing international guidance to fill the gap. A rigorous technical process with input from standard setters in 5 continents is being coupled with extensive stakeholder feedback from practitioner NPOs, donors, auditors, institutes and regulators around the world. Much as any resulting NPO Guidance is outside the mandate of the IASB (International Accounting Standards Board), their participation as official observers is very welcome and important. Make sure you follow developments by registering for updates here.
So, what are those issues, unique to the sector, that this guidance will address? That is the headline topic for discussion at the upcoming meeting of the IFR4NPO Project’s Practitioner Advisory Group in Nairobi in December, building on the thinking to date from the Technical Advisory Group.
When I recently asked the 68 accountants at the ICPAK NPO conference in Kenya, this is how they ranked the top 6 issues I asked them about:
How would you rank these issues? Please vote here. Here’s a bit more detail on each issue for you to consider:
#1 Grants or donations with time or purpose requirements and other criteria or performance obligations
Timing of income recognition and definition of performance criteria/obligation. What is the recognition and measurement process when receiving donations that are used to fulfil requirements (including a specific time and purpose requirement) in subsequent periods? When should donations to purchase a capital asset be recognised?
#2 Services in-kind (a subset of donations in-kind)
When should services in-kind be recognised and if so how are they measured? What disclosures should be provided? Recognition and measurement of ‘right of use’ donations (including free use of space and equipment)?
#3 Categorisation of expenses – function or nature
Should the primary analysis of expenses on the Income Statement be based on function or nature of spend? What should the primary headings be?
#4 Financial Statement presentation
How should financial statements be presented to help the user understanding of an NPO’s activities? Should there be disclosure of material categories of income and expenditure and/or transactions? How should unrestricted and restricted funds that can be used for specific NPO purposes be presented for the main financial statements and notes (including reserves)? How does this align with donor reporting requirements? This includes consideration of ‘grant funded assets’ shown in the poll above. How could NPOs record capital expenditure in such a way that it is picked up in donor expenditure reports, and also capitalized on the balance sheet?
#5 Narrative reporting including service reporting
What should the narrative/non-financial reporting requirements be for NPOs? Should ratios be required for narrative reporting? If they are included, how should costs be classified been support costs and those attributable to operational delivery?
The PAG meetings will be public and transparent and the papers and minutes of all meetings will be shared via our website. Please stay in touch, so you have the chance for your voice to be heard as the project progresses, especially when the consultation paper is issued in 2020, and the Exposure Draft in 2023. Tell your colleagues about this initiative and register for updates.