INPAG Exposure Draft 1 proposals in a nutshell
INPAG (International Nonprofit Accounting Guide) will provide global financial reporting guidance for not-for-profit organisations. It is an initiative spearheaded by the non-profit organisations Humentum and the Chartered Institute of Public Finance and Accountancy (CIPFA). It’s aim is to heighten transparency, quality and credibility of non-profit financial reporting and thereby enhance trust.
The lack of international financial reporting standards for not-for-profit organisations (NPOs) is a major gap in the global financial reporting literature. It may come as a surprise to many that there is no international accounting standard that meets the unique needs of the not-for-profit sector, such as restricted grants, assets that don’t generate revenue, and classifying expenditure in a meaningful and consistent way to facilitate comparison and analysis.
In many countries, there is a reliance on private sector standards, or no guidance at all. A range of differing requirements from funders of non-profits has evolved to fill this gap. Users of financial statements argue that they cannot find the information they need (such as general reserves or support costs) in annual reports. Non-profits preparing financial reports also complain about wasteful duplication of effort with respect to due diligence, audits and the high compliance burden, even as they are pressured to minimize overheads. This all makes it harder for those seeking to strengthen financial management, such as accountants, trainers and accounting software providers.
Comparable aches and pains in the public and private sectors have been alleviated over the past five decades by international financial reporting standards. Few songs have been written in praise of accounting standards, but the improved quality and consistency has increased the international flow of funds, and supported the building of trust in those sectors. This would be of significant benefit to non-profit organisations.
Development of INPAG
The first of three exposure drafts was issued in November 2022. The second and third exposure drafts will be released in 2023 (quarters two and four respectively). These three exposure drafts will contain the complete contents of INPAG for public comment, so that feedback can be incorporated into the final guidance due for release in 2025.
INPAG is using the IFRS for SMEs Accounting Standard as its base. This standard was chosen because it is a single stand alone standard that is intended to be used by a wide range of organisations and has a number of simplifications. As this standard has been developed for for-profit organisations, adaptations are being made so that it is suitable for non-profit organisations.
Exposure Draft 1 deals with some of these key adaptations so that INPAG is relevant for the primary users of NPO financial statements and addresses the key concepts and principles that are needed to underpin financial reporting for NPOs. Exposure Draft 1 looks at:
- Who do we mean by NPOs and what do users of NPO financial reports need
- What concepts and accounting principles are needed
- The scope of the financial statements, and
- Narrative reporting
NPOs and their users
Describing an NPO is not an easy task. There is a huge diversity in the types of organisations, the activities they carry out and their size and structure. This is compounded globally by differing legal and regulatory frameworks. However, despite these differences the exposure draft proposes a number of characteristics that are common across all NPOs.
Firstly, NPOs have a primary objective of providing a benefit to the public, rather than the generation of financial returns. Secondly, they direct any financial surpluses they generate back into activities that benefit the public. To help inform judgements about whether an entity is an NPO, indicators have been developed. These look at whether the entity is established to generate returns for equity holders and who has entitlement to its assets. Finally, the guidance makes clear that INPAG is not intended to apply to public sector entities as they have their own financial reporting needs and requirements.
Unsurprisingly, much of the discussion about the users of NPO financial statements has been focused on providers of funds; major donors and grant providers. Funds providers are one of several primary users that include all resource providers, those receiving services and goods from NPOs as well as those providing oversight functions on their behalf, such as regulators. Funding providers have created most contention because in some situations they are a primary user (for example, when they are using general purpose financial reports as part of due diligence when deciding whether to enter into a funding arrangement), but frequently they are the instigators of special purpose financial reports that drives much of the financial reporting complexity for NPOs.
Concepts and principles
Many stakeholders across the sector have argued that there needs to be a conceptual framework for non-profit reporting. Having concepts and principles is fundamental to developing any sort of guidance as it provides coherence and supports consistency in the application and development of accounting guidance. Exposure Draft 1 proposes to follow the IFRS for SMEs Accounting Standard approach of having concepts and pervasive principles rather than a full conceptual framework.
There are some important adaptations that are proposed. This includes the definitions of the elements of the financial statements, a proposal for fund accounting (to recognise that many NPOs receive funds that are restricted to certain purposes) and the concept of service potential (to recognise that assets can have value even if they don’t generate income, because they are held for their capacity to provide services, for example). There has been much discussion about whether equity should be a feature of NPO financial statements. Stakeholders report that some NPOs can have shareholdings, which is true in the UK where some registered charities are companies. Typically entities with shareholders operate to generate financial returns, but by definition such entities are not NPOs, This has raised questions about the importance of equity in the financial statements. This is one of the questions in the exposure draft.
The financial statements are proposed to be similar to those required by international standards. The main difference to for-profit financial statements is the renaming of the financial performance statement to the Statement of Income and Expenses, and the relocation of some items. Unlike the UK charities statement of recommended practice (SORP), the Statement of Income and Expenses stops at surplus and deficit (renamed from profit and loss), with items of other comprehensive income relocated to a Statement of Changes in Net Assets.
There are further adaptations requiring funds provided with restrictions to be shown separately in the Statement of Income and Expenses, drawing on the practice in the UK to present transactions in two columns. The Statement of Financial Position also requires that accumulated funds are split between funds with restrictions and funds without restrictions. This can provide useful information to indicate the sustainability and financial health of an NPO, as low levels of unrestricted reserves may be an indicator of lack of financial resilience. INPAG is proposing that comparatives (including figures in the multi-column format for the Statement of Income and Expenses) are required for all financial statements. This too is an area for comment as there are views that this creates too much complexity on the face of the primary statements.
Exposure Draft 1 introduces the requirement for limited scope mandatory narrative reporting. During the consultation phase there was considerable feedback that narrative reporting was vital. Some felt that narrative reporting for NPOs was more important than narrative reporting for private sector entities, and some that it was more important than the financial statements themselves.
Exposure Draft 1 has taken on board this feedback, but also noted concerns that the scope should not be too wide in case it becomes a barrier to adopting INPAG. The overall approach has been to balance the desire for transparency and harmonisation with the need for flexibility in a diverse sector. Exposure Draft 1 proposes a set of principles to underpin narrative reporting and uses the same qualitative characteristics as financial reporting with an additional requirement that the report must be ‘fair and balanced’. The mandatory requirement is focused on information to enable users to understand the NPO’s performance objectives, what the NPO has done in working towards those performance objectives and commentary to discuss and analyse the NPO’s financial statements.
A key issue, reflected in the exposure draft is the need for an exemption where the publication of sensitive information might be detrimental to the goals and objectives of the NPO. This is needed because in rare circumstances reporting disclosures could lead to risk of harm to NPO staff or volunteers or to the public that they are seeking to assist. This could include for example, human rights programs or refugee work.
There are a number of resources on the project website that explain the proposals in more detail. The project team is hugely committed to engaging diverse stakeholders from every region in the development and consultation processes . The contact details of Project Representatives from countries around the world can be found from www.ifr4npo.org/country-champions. The project team would love to hear from you on how we can improve our engagement.
Exposure Draft 1 is open for comments until 31 March 2023. Everyone involved in NPO reporting has a lot to contribute, and I encourage everyone working in this area to take a look at the draft and provide feedback.
This is an opportunity to be part of developments that seek to provide solutions to those things that you have found most difficult or still provide challenges. Share your feedback by submitting a response at: www.ifr4npo.org/have-your-say
This project is certainly not lacking in ambition or complexity, but when we look back ten years from now we should all feel proud to have been part of an initiative rising to the challenge.
First published in Charity Finance magazine and is reproduced here with permission.