The first ever non-profit organisation (NPO) international financial reporting guidance was drawn up in 2020 by a collective of accounting experts to simplify the complex process of financial reporting in the international charity sector.

Unlike in the public and private sectors there are no common international accounting standards for NPOs, and only a handful of regions have created guidance to handle the often-unique characteristics of NPOs and the types of transactions they undertake.

The NPO sector has also struggled with consistency across regions in the use of the required three classes of net assets; weaknesses in transparency and proper assessments of liquidity; inconsistencies surrounding expenses; and misunderstandings of operating cash flows.

In response, the International Financial Reporting for Non Profit Organizations (IFR4NPO) initiative set a five-year target for finalising the guidance, and launched a consultation in January inviting experts from accounting, audit and professional services along with charity organisations to respond. 

The backbone of the proposals suggests drawing on existing public or private sector standards and applying them to the charity sector. This aims to reduce the current burden on NPOs and stop the reporting arbitrage some experience in trying to meet multiple international reporting standards. 

The ICAEW agreed that using existing standards in the private sector, and suggested IFRS for SMEs, would be a good starting point. 

“It will, however, be important to define the primary user and then critically assess the requirements of the standard to decide if they meet the user needs,” the ICAEW said in its consultation response. “This might result in certain requirements being deleted or simplified, while other requirements may need to be added.”

Using existing standards would also enable the project to assess the experience of countries that have done similar, such as the UK in regard to the international funding community, the ICAEW said. 

However, the Institute has warned that additional costs may pose risks for some charities who comply with the guidance, and highlighted the need to ensure they benefit from that outlay.

“This will require widespread acceptance of financial statements produced in accordance with the guidance by relevant users (including, but not limited to, funders),” the ICAEW said. 

There are also concerns that while the guidance is intended to be voluntary, it may become so widely accepted that NPOs are forced to adopt it.

This may not be in the interests of smaller charities, which make up a huge percentage of the UK sector as opposed to larger NPOs that have a global presence, fundraising base and multiple sources of income. 

The International Financial Reporting for Non Profit Organizations (IFR4NPO) initiative is coordinated by the Chartered Institute of Public Finance and Accountancy (CIPFA) and Humentum, a global charity.

ICAEW member Samantha Musoke, Humentum's Project Director IFR4NPO, is based in Uganda, and recently gave a detailed interview to Insights outlining why the project is so important, and how to improve trust in the charity sector.