International reporting standards for charities could be introduced within five years

The Charity Finance Group says the long-term project is 'a major transformation in international charity accounting'

Accounting
Accounting

Standardised accounting and greater transparency in the reporting of international charity finances could be brought in within five years if new proposals are finalised. 

Membership bodies have welcomed the announcement after the first non-profit organisation international financial reporting guidance was drawn up last year by a collective of accounting experts.

Their aim was to simplify the complex process of financial reporting in the international charity sector, according to the membership body the Institute of Chartered Accountants in England and Wales.

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 ICAEW said the sector had 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. 

IFR4NPO’s proposals suggest drawing on existing public or private sector standards and applying them to the charity sector, with the aim of reducing the current burden and stopping the reporting arbitrage some charities 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,” said the ICAEW. 

“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. 

But the ICAEW warned that additional costs could pose risks for some charities who complied with the guidance, and highlighted the need to ensure they benefit from that outlay.

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.

ICAEW said this might 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. 

Roberta Fusco, director of policy and communications at the Charity Finance Group, said this work brings the sector closer to achieving the “long-held ambition” of a dedicated, non-profit reporting standard. 

She added: “While we have a mature reporting regime here in the UK with Sorp, it’s vital that we support and engage with the project and share our expertise where we can.  

“This is a long-term project with many moving pieces, but the opportunity to influence a major transformation in international charity accounting, and ultimately build greater trust  and accountability, is one we should not miss today or further down the line.”

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