Financial reporting standard for not-for-profit entitiesMonday July 18 2022
Not-for-profit organisations in Kenya are registered either as NGOs under the Non-Governmental Organisations Co-ordination Act (Cap 19) of 1990, companies limited by guarantee under the Companies Act 2015, Trust’s under the Trustees (Perpetual Succession) Act, Societies under the Societies Act, Cooperatives and Unions or Community-Based Organisations under the Ministry of Gender and Children affairs.
The common denominator for most not-for-profit organisations is that such organisations are funded through donors either directly or through parent entities and also have wide base of stakeholders including the communities in whose benefit they operate.
The key laws governing NPOs depending on nature of entity include the Companies Act 2015, Income Tax Act and the Non-Governmental Organisations Co-ordination Act (Cap 19) of 1990, which require the NPOs to prepare annual financial statements in accordance with International Financial Reporting Standards (IFRS).
The Institute Certified Public Accountants of Kenya (ICPAK) recognises both IFRS and the International Financial Reporting Standard for Small and Medium-Sized Entities (IFRS for SMEs) as acceptable frameworks for preparation of general purpose financial statements.
Both IFRS and IFRS for SMEs are written with a focus on the information needs of stakeholders of private profit-making entities.
The key difference between for-profit and non-profit is that NPOs rely on funding from donors while for-profit generate their own revenue. These standards have no specific guidance for some of the unique transactions related to accounting for donor funds and the expenditure incurred therefrom.
For example, accounting for grants and donations, as well as gifts and services in-kind and accounting for assets held for future service delivery pose challenges for many NPOs.
Other jurisdictions such as UK, US, Australia, New Zealand and Canada have tried to address the financial reporting needs of NPOs by issuing specific national standards and guidelines.
The UK regulators have developed Financial Reporting (FRS 102) for entities not applying IFRS. In the UK this takes the form of Statement of Recommended Practice developed for charitable organisations.
It covers among other nuances, the accounting for restricted and unrestricted donor funds, fund accounting including guidance on transfers between funds, accounting for grant commitments and most important recognition of expenditure.
It also gives further guidance on when to recognise grants with conditions. In the US, the Accounting Standards Codification includes specific standards for NPOs.
A lack of a relevant and standardised accounting framework for NPOs undermines the consistency and usefulness of financial reports and also the ease of preparation of such financial reports.
Some of the key relevant areas that should be addressed relate to the accounting for restricted funds, deferred income, grants receivable, inventories held for distribution or consumables, project property and equipment and the corresponding grant income and sub-grantee funding.
There is also the need to have a standardised format for the presentation of the financial statements that are specifically relevant to NPOs rather than adopt the guidelines that have been established for a completely different class of stakeholders in private entities incorporated for profit-making.
On the international scene, there is currently a collaborative initiative to develop the world’s first internationally applicable financial reporting guidance for NPOs, which is dubbed IFR4NPO.
The project is currently at the consultation stage where various questions, proposals and alternatives have been issued for input from the public and is expected to issue a guide in 2025. The NGO Board and ICPAK can coordinate the initiative with a view to ensuring the unique reporting challenges of NPOs in Kenya are factored into the final standard.