INPAG Exposure Draft 3 unpacked – by IFR4NPO

* Please note that the abridged version of this blog was first published in the Public Finance Magazine as Simplifying financial reports for non-profits worldwide.

IFR4NPO is an ambitious project to develop International Non-Profit Accounting Guidance (INPAG). It will stand alongside accounting standards designed for the for-profit and public sectors, and address the unique needs of the sector when it comes to producing ‘annual audited accounts’, as well as donor reports. We are working to improve the usefulness, consistency and reliability of financial reports, while reducing the burden on Non-Profit Organisations (NPOs) caused by multiple formats.

This will be a game-changer for trust-based philanthropy and locally-led development. The guidance has substantial input from stakeholders in the .  Compliance with an internationally recognised standard will put local organisations in a better position to attract funding. In 2022 local actors directly received only 1.2% of international humanitarian assistance.  And the NPO financial reports will go beyond the specific needs of providers of project-based funding, and be relevant to a wider range of stakeholders and civil society.

Consensus building with globally diverse voices takes time, but is well worth the effort. The project started in late 2019, and in early 2022 we published the first of three ‘Exposure Drafts (EDs)’ – that is the proposed guidance text, released for public comment.

ED3 is the pinnacle, building on all the work so far to address the issues that matter most to the sector. It was published on 28 May 2024, and is open for comment until 16 September 2024. Importantly, it includes a full set of illustrative financial statements, that enable us to visualize the outcome of all the proposals. This article unpacks the proposals in ED3 relating to:

  • Fund accounting
  • Reporting on specific grants or projects
  • Cost classification
  • Fundraising costs


Fund accounting

Fund accounting is the practice of tracking the receipt and use of resources, according to their intended use. It’s an essential feature of non-profit accounting that enables NPOs to demonstrate accountability for funds that have been given for a specific purpose. It also assists the measurement of financial resilience in terms of available unrestricted fund balances or reserves. ED3 addresses the unique needs of the sector by explaining how to account for transactions, and present balances on funds, with and without restrictions.

While this method of accounting is undoubtedly important and valuable, it is not easy. This has implications for systems requirements and staff capability, which may be a challenge for some NPOs, especially smaller ones. One of the trickier practical aspects is tracking different fund balances, so that they can be carried forward across reporting periods. We hope that with internationally recognised definitions and processes, accounting software providers will be motivated to step up and provide this functionality, even for low budget packages.

Bringing together the proposals for revenue recognition in ED2 and fund accounting in ED3, it is worth pointing out that there is a distinction between use restrictions which affect presentation only, and grant delivery obligations, which affect income recognition. The existence of donor-imposed or donor-enforced use restrictions is not a basis for revenue deferral in INPAG. It is recognised that this may represent a significant change from current practice for a number of NPOs around the world.

The proposals provide transparency about different funds at a holistic, whole-of-entity level. This removes some of the barriers to unrestricted and flexible funding because donors can have transparency about how funds are used without r special reports. The de-coupling of accountability and external control is at the heart of locally-led development and trust-based philanthropy – INPAG provides the accounting and reporting mechanisms to make that possible.


Reporting on specific grants or projects

One of the biggest headaches for NPOs that receive grant funding, is the multiple reporting requirements. Each donor can prescribe their own different headings, formats and accounting rules as a condition for funding. These rules have usually been developed with the valid objective of ensuring appropriate accountability, both for funds and impact. Such guidelines have been necessary because there is no generally accepted international accounting framework that caters for ‘gifts with strings’ – ie restricted grants or performance based grant agreements. Despite the good intentions, the cumulative effect of the diversity of requirements is that compliance consumes resources, and is a distraction from the mission.

There are many active conversations in the sector about providing more funds directly to local organisations (also referred to as localization), and there is recognition that bespoke budget templates and reporting formats are structural barriers to realizing that vision. We now have the opportunity of a generation to improve the funding ecosystem.

The primary focus of INPAG is ‘whole-of-entity’ financial reports, providing guidance that can be adopted by countries as part of their mandatory accounting requirements (also called GAAP).  But beyond that, ED3 also includes INPAG Practice Guide 1, which offers an optional standard format for ‘Supplementary statements’ relating to specified activities, such as a particular grant or project.

It includes a standard list of expenditure headings, including expenditure on assets (or CAPEX). While the basic format is fixed, there is flexibility about additional columns of information, such as showing the figures in donor currency, or in comparison to a donor budget. NPOs may present one or more of these ‘Supplementary statements’ as an annex to the main general-purpose financial statements and notes, either by choice or as a donor reporting requirement. This harmonization allows NPOs to set up their accounting systems so that generating these reports is easier, quicker, and less error prone.

If an NPO’s financial statements and annexes are published, or shared with stakeholders benefiting from their activities, this can also be an excellent way to improve societal accountability, which too often gets a back seat.

And there’s a win for donors too. The current practice of producing and auditing separate reports for individual grants is quite risky. The reports tend to lack a strong link to the main double entry ledger, which increases the risk of errors or even unidentified fraud – especially double counting, where the same cost is charged to more than one grant. The proposals in INPAG Section 37 and the Practice Guide create a bridge between the whole-of-entity financial reports and the Supplementary statements. This will be a game-changer for assurance.

Interestingly, some stakeholders involved in public financial management have speculated about the scope for governments that receive and account for grants to use the same format.

Members of the project’s Donor Reference Group have been instrumental in the development of these proposals, and many have signed this ‘DRG Statement of Support’. We call on all grant makers to review the harmonised format, and also encourage funders to join us in testing it with willing grantee organisations. This will provide invaluable information for honing the proposals ahead of publishing the final version in 2025.


Cost classification

Imagine trying to consistently classify cost types on the Income and Expenditure Statement across all the different types and sizes of NPOs in the world – eg a local church or mosque, a non-profit university with fees and research grants, a small NGO running 2 projects, and an INGO operating 5 programmes in 6 countries. Should expenses be shown according to their nature (eg salaries, travel costs, supplies etc), or according to their function (eg direct programme, grant making, fundraising, governance, support costs)?  For NGOs that run projects, direct costs are often charged to projects on a line-by-line basis for each cost type, while support costs are a single line item on the grant report – that is a mixture of nature and function!

Requiring one single approach for cost headings in the financial statements is therefore not likely to be helpful. That said, NPOs do generally track the nature of expenses in their accounting systems as a basic minimum, eg coding an expenses to ‘salaries’.  NPOs with more sophisticated accounting systems may add additional layers of coding, attributing costs to particular functions, programmes, or activities etc.

To make it easier for smaller organisations, the guidance has the default presentation by nature of expense. No specific headings are prescribed in INPAG itself, but the standard headings in INPAG Practice Guide 1: Supplementary statements could be a useful reference.

An NPO that wishes to present their expenses by function, or a mixed analysis may do so if this provides better information. INPAG also requires the disclosure of specific expense information in the notes to aid comparability.

By suggesting a default classification system, but allowing for flexibility, there is a balance of moving towards harmonization, while recognising the diversity in the sector. Principle-based definitions of direct, shared and support costs, can help provide an audited base for the calculation of indirect cost rates that are useful in grant negotiations. Transparency about support costs opens the door to meaningful conversations about the value of activities included in ‘overheads’, and negotiations about full cost recovery.


Fundraising costs

NPOs need to raise funds for their missions. These activities could range from encouraging members of the public to make donations, to holding fundraising events, to writing grant proposals. It might also involve more commercial types of income generation such as selling goods or services for a ‘profit’ that is directed towards the missional activities.  It could even include the cost of managing funds where the interest or gains are directed towards missional activities.

Users of financial statements are often interested in these costs, as they may have relevance to questions about income quality and sustainability, the net amounts generated for missional purposes, the efficiency and effectiveness of fundraising activities, or eligibility of fundraising costs charged to grants.

INPAG provides a definition of fundraising costs, and disclosure requirements according to the three categories: i) donations, gifts and grants, ii) commercial and trading, & iii) investment management.

Illustrative financial statements

Many of the INPAG Sections include illustrative examples as part of the implementation guidance, but with this final Exposure Draft we can now see the big picture. A full set of Illustrative financial statements enables visualization of the outcome of all the proposals at a macro level. What are the big questions that users come to the financial statements with, and where can they find the answers?

The financial statements include some of the most common types of transactions that are expected to be found in NPOs, but will never be representative of the vast diversity of entities that could adopt INPAG. We hope to do a bigger piece of research including case studies with particular NPOs in due course.

This Exposure Draft is the result of many months of analysis and deliberations with diverse individuals and organisations in focus groups, the Technical and Practitioner Advisory Groups, and the Donor Reference Group. We are delighted to share it with the wider world and look forward to your comments and feedback.  At face value, this project appears to only be about technical accounting issues – but it is actually pivotal in transforming the entire global funding ecosystem. It is vitally important that we receive input from non-accountants!

Visit to participate in the consultation. The closing date is 16 September 2024.


Authored by Samantha Musoke, IFR4NPO Project Director, Humentum and Karen Sanderson, INPAG Technical Director, CIPFA.

The INPAG Exposure Draft 3 Webinar Series will hold from July 9 -25.  This series will cover key proposals in the Exposure Draft 3. Each one is for 60 minutes starting at 11:00 UTC / GMT.

This is a great opportunity for stakeholders in our Country to become familiar with the proposals, ask questions, share comments, and learn how to respond to the consultation. The events will be held in English, and will support participation in Spanish and French.

You can see information about all the events and register here.