International Financial Reporting Standards (IFRS) have been developed to meet the needs of the private sector, with the interests of investors driving much of its development. International Public Sector Accounting Standards (IPSAS) have been developed for governmental bodies, acknowledging that the nature of these entities and the information needs of users (including citizens) are different from for-profit businesses.

But for non-profit organizations (NPOs), there are currently no equivalent standards. Many NPOs have unique transactions and ‘economic events’ that are markedly different from those seen in the private or public sectors. Furthermore, stakeholders and users of financial information have reporting needs that do not entirely match those considered by existing international standards. Financial reporting issues for NPOs have been subject to much debate globally for many years. Issues have been raised in academic studies, by standard setters and by stakeholders and members of the NPO community, including donors. Calls for NPO-specific standards have gained momentum not least because of the wide variety of non-profit entities that exist - humanitarian aid organizations, educational bodies, non-governmental organizations (NGOs) and religious bodies represent just a few.

Examples of the issues that are not adequately addressed in existing international standards include non-exchange transactions, such as the receiving and giving of grants and donations, as well as gifts and services in-kind. Many NPOs rely heavily on cash transfers (grants and donations) for both day-to-day operational costs and projects or programmes. Gifts-in-kind, services-in-kind, fundraising and assets held for future service delivery represent just a few of the transactions that can create real issues when financial reports are compiled using non-NPO specific reporting standards.

Additionally, current reporting standards don’t always meet the needs of funders and donors. With the above components of NPO finance not consistently portrayed in NPO financial statements, it can prove difficult for funders to properly assess the health, integrity and historical success of NPOs. Likewise, NPOs can, and do, struggle to better demonstrate their own capacity to potential funders. Additionally, donors may be interested to understand what has happened to their cash donations.

Financial reporting formats also vary among multiple donors, with further complexity arising from requests for different information at different points in time. The picture is even more complicated when you consider the different forms of regulation that must be complied with, if a NPO operates in different jurisdictions. With the potential for numerous due diligence processes to follow and multiple project audits to comply with, NPOs face much more strain than necessary. Overall, there is a vast duplication of efforts – which has a direct impact on NPO capacity, transparency, efficiency and the accuracy of financial information provided.

There are a few jurisdictions that have already responded to this standards gap by developing their own guidance for NPOs. However, such guidance is usually aimed at providing reporting solutions to meet that individual jurisdiction’s needs, rather than a view towards international applicability. Unsurprisingly, this guidance has not been subject to full international consultation. These issues only represent some of the challenges that preparers of NPO financial statements struggle with on a daily basis. However, they serve as key reminders that the absence of internationally applicable guidance specifically for NPOs has been left too long.

CIPFA is proud to be working with Humentum on the International Financial Reporting for Non-Profit Organizations (IFR4NPO) project, a five-year initiative designed to address these outstanding accounting issues through the development of the world’s first internationally applicable financial reporting guidance for the non-profit sector.

To establish firm foundations for the initiative, CIPFA has convened a Technical Advisory Group (TAG), which provides valuable insight on NPO technical accounting issues from national standard setters from every continent, as well as input from the International Accounting Standards Board (IASB). Humentum has convened a Practitioner Advisory Group (PAG), which offers insight and feedback from NPOs, funders, academics regulators and auditors around the world, all of whom will be using and applying the project’s future guidance. Together the PAG and TAG are working to ensure the financial reporting guidance developed by the IFR4NPO project addresses the financial reporting challenges NPOs face globally.

Published today, the consultation paper is a key milestone for the IFR4NPO project. The public consultation gives NPOs and their stakeholders the opportunity, for the first time, to contribute to the development of the upcoming guidance. Feedback to this consultation paper will shape the future of financial reporting in this important but diverse sector. The comment period is open until 30 July 2021 on the generic financial reporting issues facing the sector and proposed way forward, and for an additional two months on the specific issues, until 24 September 2021.

Interested in contributing to the development of the first internationally applicable financial reporting guidance for non-profit organizations? Please participate in the consultation and submit your responses here.