April 27, 2021
With the effects of the COVID-19 pandemic taking centre stage in the world at the moment, there has been an increase in Not-for-Profit Organisations (“NFPOs” or “Not-for-Profit”) springing up to assist the government with social services. These organisations attract huge funds from various external sources to support the disadvantaged and the vulnerables in the society. While their aim is not to make profit and their activities are applauded by the society, these organisations are prone to public scrutiny with respect to accountability and transparency in their operations. Accountability and transparency can be achieved through proper accounting and financial reporting.
This article discusses the accounting and reporting framework required for not-for-profit organisations to ensure accountability to the diverse stakeholders of NFPOs.
A Not-for-Profit Organisation is an “entity without transferable ownership interests, organized and operated exclusively for social, educational, professional, religious, health, charitable or any other not-for-profit purpose. Its members, contributors and other resource providers do not, in such capacity, expect pecuniary return directly from the organisation”.
Not For Profit Organisations are entities that are formed for the promotion of public good and societal advancement and do not have shares and shareholders. Any surplus arising from their activities are not distributed to their owners. These organisations are registered as “Companies Limited by Guarantee” in line with the provisions of the Companies and Allied Matters Act (CAMA) 2020. In the determination of the accounting and financial reporting framework, it is important to note that stakeholders have diverse information needs. Some may require information to assess the impacts of their donations and contributions on the set objectives of the organisation, while others require financial reports.
Since accounting and financial reporting play an important role in accountability and transparency, NFPOs should present in their financial statements, both financial and non-financial information to ensure all stakeholders’ needs are satisfied.
International Financial Reporting Standards (IFRS) have been developed for the financial reporting needs of profit-oriented entities. However, there are currently no equivalent standards for NFPOs. Many NFPOs have unique transactions and economic events that are different from those found in the private or public sectors. Also, the financial reporting needs of stakeholders and users of NFPOs’ financial information are also different from those in private or public sectors. Financial reporting issues for NFPOs have been subjects of debate globally for many years. A number of jurisdictions have developed guidances in order to respond to this gap. There are ongoing efforts to establish NFPO-specific standards. Currently, The Chartered Institute of Public Finance and Accountancy (CIPFA) is working with Humentum on a project titled “International Financial Reporting for Non-Profit Organizations (IFR4NPO)”.
The project is a five-year initiative designed to address the existing financial reporting gaps with the aim of developing the world’s first internationally applicable financial reporting guidance for the non-profit sector.