Accounting Standards

ICAEW welcomes new international charity finance standards

New proposals suggest drawing on existing public or private sector standards and applying them to the charity sector, in a bid to reduce the current burden on NPOs

Proposals to bring standardised accounting and greater transparency to international charity finance reporting have been welcomed by the ICAEW.

In order to “simplify the complex process” of financial reporting in the international charity sector, the first ever non-profit organisation (NPO) international financial reporting guidance was drawn up last year by a group of accounting experts.

Prior to this, only a “handful” of regions have created guidance to handle the “often-unique” characteristics of NPOs and their transactions. In addition, the NPO sector has reportedly 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.

It also launched a consultation in January inviting experts from accounting, audit and professional services along with charity organisations to respond. 

Its proposals suggest drawing on existing public or private sector standards and applying them to the charity sector, in a bid to reduce the current burden on NPOs and stop the reporting arbitrage some experience in trying to meet multiple international reporting standards. 

The ICAEW said it agreed that using existing standards in the private sector would “be a good starting point”. It added that 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.

In its official response, the ICAEW said: “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. This might result in certain requirements being deleted or simplified, while other requirements may need to be added.

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

The institute did warn 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.

It said: “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.”

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