• Wednesday, December 04, 2024
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A suit made to fit: New international accounting standards for the nonprofits

A suit made to fit: New international accounting standards for the nonprofits

As the non-profit organisations (NPO) sector in Nigeria continues to expand, new regulatory frameworks are fundamentally reshaping the landscape for financial reporting, accountability, and taxation. For a considerable time, the Non-Profit sector has been utilising accounting standards that are either excessively or inadequately detailed in preparing its financial statements. Consequently, some have been erroneously accused of financial statement manipulation or falsification. Nevertheless, the reality is that they are compelled to publish their accounts according to standards designed for profit-making organisations or government bodies. It is understandable that IFRS initially focused on profit-making companies, both large and small. Nevertheless, an active participant in the Non-Profit sector is aware that the extant IFRS standards and the IFRS for SMEs are ill-suited to NPOs.

Globally, non-profit organisations have long struggled with the lack of a unified accounting standard tailored to their unique needs. Unlike businesses, whose primary goal is profit, NPOs are mission-driven and focused on societal goals such as education, healthcare, and poverty alleviation. These objectives require a distinct approach to financial reporting that goes beyond the traditional bottom-line focus to account for mission achievement, community impact, and accountability to a wide range of stakeholders, including donors, beneficiaries, and regulators.

The International Non-Profit Accounting Guidance (INPAG) is set to revolutionise the way NPOs prepare their financial statements. This is a truly transformative moment for the sector. It’s creating new opportunities and challenges for NPOs committed to social impact. In the past, while some countries have developed their standards for non-profits, there is now an opportunity to create a unified set of standards that can meet the complex information needs of stakeholders. The current international accounting standards for businesses have proven to be inadequate when it comes to issues critical to NPOs, such as accounting for grants, donations, and restricted funds. This gap has led to the creation of the IFR4NPO initiative, which is set to transform the financial reporting landscape for nonprofits.

The International Non-Profit Accounting Guidance (INPAG), developed by the IFR4NPO project, is a truly groundbreaking effort to establish a global standard for non-profit accounting. The INPAG is scheduled for release in 2025. It has been developed under licence from the International Federation of Accountants (IFAC) and the IFRS Foundation. It uses the IFRS for SMEs standard as a foundation while adding some new guidelines for fund accounting, donor reporting, and narrative reporting. These are all essential elements for non-profit accountability. A crucial addition is narrative reporting, which provides context beyond numbers, allowing NPOs to communicate their performance objectives, goals, and achievements. This component is particularly valuable for mission-focused organisations.

Some years ago, during an audit presentation for an NPO focused on providing technical skills to underprivileged youth, a trustee raised concerns about the NPO’s significant bank balance, suggesting it could attract regulatory scrutiny. The NPO had received a donation from an individual who wished for the funds to be used for training students. This amount could not be classified as a liability because the NPO is not under any obligation to anyone, except a moral duty to respect the donor’s will. On the other hand, they have not earned the income because they have not fulfilled their obligation to the donor and the prospective beneficiaries. The concept of restricted funds was not widely understood, making it challenging to accurately portray the NPO’s financial position. INPAG introduces guidelines for reporting on restricted funds, which must be used for specific purposes designated by donors. This framework allows NPOs to communicate how funds are allocated and ensures donors that their contributions are used appropriately. Furthermore, stakeholders have occasionally reacted adversely to financial reports due to the misconception that a deficit in an entity’s income and expenditure is inherently negative. Due to the mission-focused nature of NPOs, financial health provides only partial insight into the year’s performance.

For non-profit organisations in Nigeria, the adoption of INPAG could potentially offer a valuable opportunity to enhance financial accountability and align with global standards. INPAG will enable NPOs to communicate their financial health and their mission-driven achievements. A holistic reporting approach will help to strengthen trust with the different stakeholders, including donors, government agencies, and beneficiaries who rely on the services that these organisations provide.

For example, an NPO that provides healthcare services may find it challenging to convey its impact through traditional financial reporting. If the NPO raises funds to support medical treatments for underserved communities, its financial reports may not reflect a significant surplus, which could potentially give rise to doubts about its financial sustainability. However, the key sustainability of the NPO is dependent on its ability to demonstrate to its stakeholders, the donors, that all donations received have been used to provide health services to the targeted beneficiaries.

While INPAG will bring welcome changes in financial transparency, recent amendments to Nigeria’s Finance Act 2021 have prompted discussion within the sector regarding the tax obligations of NPOs. The act alongside the 2022 Appropriation Bill, requires non-profits to carefully monitor income generated from activities outside their primary mission. It is important for NPOs to distinguish between core and non-core activities. While NPOs can retain their tax-exempt status for mission-aligned activities, revenue generated from unrelated commercial activities will be subject to taxation.

The Finance Act 2021 invites reflection on the broader debate around how non-profits are defined and assessed for tax purposes. In Nigeria, the regulation of non-profit organisations is overseen by the Corporate Affairs Commission (CAC) under PART F of the Companies and Allied Matters Act (CAMA) 2020. This classification allows NPOs to benefit from tax exemptions based on their mission and the non-distribution clause in their constitutions, which stipulates that surplus revenue should be reinvested in the organisation rather than distributed to members or directors.

The combined impact of INPAG and the amendments to the Finance Act signals a shift towards greater accountability for Nigeria’s non-profits. The INPAG framework offers NPOs the opportunity to enhance their credibility, communicate impact, and reinforce stakeholder trust through the implementation of standardised reporting practices. The Finance Act’s tax provisions highlight the value of remaining true to the core mission and ensuring that revenue-generating activities are aligned with the organisation’s stated purpose.

As these frameworks evolve, it would be beneficial for Nigerian nonprofits to continue engaging with policymakers to ensure that their financial statement and tax reporting accurately reflect the unique nature of the sector.

 

Mba is a Fellow of the Institute of Chartered Accountants of Nigeria, and a Partner at Fag Consulting, an audit and accounting firm, with over two decades of expertise in finance and accounting for non-profit organisations

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