ACCOUNTING STANDARD FOR
NOT-FOR-PROFIT ORGANIZATIONS
Presented by:
Usman Tahir Farooqi, ACA
Director, Advisory Services
Anjum Asim Shahid Rahman
February 06, 2015
ICAP House, Lahore
The time has come for all
evangelists to practice full financial
disclosure. The world is watching
how we walk and how we talk. We
must have the highest standards of
morality, ethics and integrity if we
are to continue to have influence.
(Billy Graham)
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Table of Contents
Introduction and Background
04
Brief on Standard Development Process
07
General Framework
08
Specific Framework
15
Inventories
16
Tangible and Intangible Assets
18
Strategic Investments
21
Contribution
22
Fund Accounting
26
Related Party Transactions
31
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Introduction and Background
NPOs are organizations:
►
Formed for non-profit purposes
►
Without transferable ownership interest, may earn profit
►
Financial dispositions promote entity’s objectives
NPOs may include:
►
Charities / Foundations
►
Welfare organizations
►
Professional and trade associations
►
Institutions
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Introduction and Background
Need for replacement of existing ICAP guideline for NPOs (2009
version) by a focused standard outlining bare minimum
requirements to report financial information by an NPO
especially for areas which are not dealt with in primary source.
It is applicable on NPOs that are registered under section 42 of
the Companies Ordinance, 1984; however, others will have a
recommended framework in place for adoption.
A four tier arrangement for NPOs is under consideration for
adoption to determine applicable/primary financial reporting
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framework
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Introduction and Background
Size
Annual Revenue
Framework
Large Sized
More than Rs.500 million
IFRS (IASB)
Medium Sized
Between Rs.100 million and Rs. 500 M
IFRS for SMEs (IASB)
Small Sized
Not in any other category
AFRS for SSEs (ICAP)
Micro
Less than Rs.10 million
(Not registered under the CO, 1984)
Cash receipt and
disbursement basis
Adoption of a superior set of standards is not restrained.
NPO to be classified for two consecutive years accordingly
In case of a conflict situation, primary reporting Framework 6
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shall prevail.
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Standard Development Process
Accounting Standards Committee
representation of all stakeholders
(ASC/Committee)
has
Formation of sub committee to review existing guideline and
global standards
Finalization of draft for review by ASC
Approved draft was exposed to solicit comments from members
This session is for education and awareness of PCP members
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Submission of draft to SECP for notification.
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General Framework
►
The proposed Standard for NPO follows the same conceptual framework as
IRFSs, FRS-MSE and AFRS-SSE. An NPO follows the same rules of accounting
as those required for all entities.
►
The definitions of assets and liabilities are the same and the not-for-profit
organization must also follow accrual accounting except in case noncorporate Micro NPOs.
►
The revenue recognition criteria are the same as those of profit-oriented
enterprises except that contributions to a not-for-profit organization are
considered revenue.
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General Framework
►
Objective of financial statements
►
Contents of financial statements
►
Characteristics of financial statements
►
Financial statements assertions
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General Framework – Objectives of FS
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Fair presentation of financial results to provide information to the users of
financial statements for decision making
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The objective is achieved through:
►
Specific contents
►
Qualitative characteristics (materiality, substance over form,
completeness and timeliness in addition to relevance, reliability,
understandability and comparability)
Underlying Assumptions
►
Going concern
►
Accrual basis
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General Framework – Contents of FS
►
Statement of financial position
►
Statement of income and expenditure
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Statement of changes in net assets
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Statement of cash flows
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Notes to the accounts
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General Framework – Contents of FS
► Statement
of financial position
► Description of assets and liabilities similar to profit oriented entities
► No shareholders
equity and the difference of assets and liabilities is shown
as net assets or fund balance
► May present
assets / liabilities using fund accounting
► Statement
of income and expenditure
► Reflects net income / surplus similar to profit oriented entities
► May classify expenses by:
► Nature (Salaries, rent, utilities etc.
► Functions (administrative, research)
► Programs (education, health)
► May present activities using fund accounting
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General Framework – Contents of FS
► Statement
of changes in net assets
► “Total net
assets” represents the organization’s residual interest in its assets
after deducting its liabilities.
► The
statement of changes in net assets replaces the statement of changes in
retained earnings and the statement of changes in equity that is prepared by
a profit-oriented entity.
► Statement
of cash flows
► The
statement of cash flows is the same as that shown for profit-oriented
entities.
► Cash from
financing activities would include contributions that are
endowments or are restricted for the purchase of capital assets as well as to
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redeem debt financing.
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General Framework – Qualitative characteristics
► Understandability
► Relevance
► Timeliness
► Materiality
► Reliability
► Substance
over form
► Completeness
► Comparability
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Specific Framework
Only applicable for NPOs
No requirement in primary sources and other reporting frameworks
Specific accounting and disclosure requirements:
Inventories
Tangible/intangible assets
Strategic investments
Contribution
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Fund accounting
Related party transactions
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Inventories
An NPO is not required to record materials or services that are donated to
it.
An NPO can only recognize materials or services if:
Fair value can be reasonably estimated
Materials/services are used in the normal course of the organization’s
operations and would otherwise have been purchased (6.15).
If the NPO records the inventory, it measures it at fair value at the date of
the contribution
Inventories held for distribution at no charge / nominal charge are
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recognized at lower of cost and replacement cost
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Inventories
Examples
An NPO has received inventory item as donation. The original cost of that
item is Rs.10,000 and the current market price is Rs.120,000
The NPO intends to distribute the above item free of cost. The carrying
value is Rs. 9,000 and current purchase price is Rs.8,000
An NPO regularly receives services of various volunteers to run its business
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Tangible Capital and Intangible Assets
NPOs follow the same criteria as profit-oriented companies with respect to
the recognition and measurement of tangible capital assets and
intangibles;
Capitalized at cost and then depreciated /amortized over their useful life,
In the case of land or an intangible that has a infinite life, at cost
If the capital asset is contributed, or if the organization purchases the asset
at an amount significantly below fair value, cost is considered to be the fair
value at the date of the contribution.
If in the rare circumstance that the fair value cannot be determined, the
capital asset is recorded at a nominal value.
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Tangible Capital and Intangible Assets
If micro entity’s average annual revenues for the current and preceding
period are less than Rs. 10 million, it is not required to capitalize and
depreciate its capital assets (Section 8.1).
These “Micro NPOs” may be more interested in cash flows, and as such,
they are allowed to immediately expense these costs, or to capitalize these
assets and not depreciate them.
If the NPO subsequently has revenues more than Rs. 10 million, it must
begin to capitalize and depreciate assets going forward.
If the revenues then fall below Rs. 10 million again, the organization still
continues to capitalize and depreciate assets. The exemption is lost forever
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and is no longer available to it.
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Tangible Capital and Intangible Assets
Collections are defined as works of art and historical treasures that have
cultural, aesthetic, or historical value that is worth preserving perpetually.
The difficult aspect in presenting these collections is valuation. These items
are usually received as a contribution and as such the organization does not
have the benefit of an arm’s length transaction to determine fair value.
Standard for NPOs allows a not-for-profit organization not to record any
cost for these collections. The organization decides whether the benefit to
be derived from the fair value outweighs the cost to determine the fair
value (10.4).
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Section 4: Strategic Investments
The NPO is required to follow the IRFSs, IFRS-SME, AFRS-SSE with
respect to the accounting and reporting its strategic investments.
NPOs may invest in profit-oriented entities, other not-for-profit entities,
or may have other economic interests. The proposed Accounting
Standard for NPOs defines an economic interest as an organization:
that holds resources that must be used to produce revenue or
provide services for the reporting organization, or for whose
liabilities the reporting organization is responsible (11.1).
there is a presumption that control exists if the organization has the
right to appoint the majority of the other entity’s board of directors.
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Contributions
Contributions are revenue from primary sources (donations / grants), may
be in the form of cash or in kind
Recognized as revenue or deferred grant, examples include:
An NPO has received donation of Rs.10 million from an international
donor with no restrictions. The amount is placed in a bank and profit
of Rs.500,000 was earned during the year
An NPO has received donation of Rs.10 million from an international
donor which has to be spent in 3 years
A motor vehicle has been donated to an NPO for flood relief work
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Contributions
A contribution receivable should be recognized as an asset if it meets both
of the following two criteria:
The amount to be received can be reasonably estimated.
Ultimate collection is reasonably assured.


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There are two methods to account for contributions: the deferral method
or the restricted fund method.
Using the deferral method of accounting, expenses are recorded in the
period in which they occur and restricted contributions are then brought
into income to match against those expenses.
If the expenses will only be incurred in a future period, the contribution is
shown as a deferred liability until such point as the expenses are incurred.23
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Contributions
Externally restricted resources would be presented as deferred
contributions.
Internally restricted resources are determined by the entity, for instance
an amount to be invested in capital assets, and the contribution is
deferred to offset against the related asset.
This is sometimes referred to as an “appropriation.”
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Contributions – Restricted Fund Method
Under the restricted fund method, the organization classifies its restricted
operations by fund and recognizes the contributions immediately as
revenue of that particular fund.
When using the restricted fund method, the organization will have at least
a general fund, which is composed of non-restricted contributions, and an
endowment fund. Any other funds that it uses must be restricted by an
external source, e.g. capital assets fund.
It is up to the not-for-profit organization to decide how many restricted
funds it wants to report.
Any restricted funds that do not have a separate fund are reported using
the deferral method through the general fund.
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Section : Fund Accounting
Funds
Unrestricted
funds
General
fund
Restricted
funds
External
restrictions
Endowment
fund
Internal
restrictions
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Fund Accounting
A not-for-profit organization may choose to disaggregate, or separate, its assets
and liabilities by the activity that they belong to and/or to disaggregate the
operating activities by the nature of the activity.
One way to clearly reflect the results of various different activities is to keep each
activity in a separate fund.
This is just like to setting up multiple different sets of statements, one set for each
activity. Each fund would then be added together to present the overall financial
statements of the organization.
When all the funds are added together, the inter-fund transfers are in effect
eliminated as they are inter-entity. The inter-fund transfers are not considered
revenue or expenses of the entity and as such are reflected only in the statement
of changes in net assets.
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Restricted Fund
A restricted fund is a segregation of funds that are externally or internally
restricted for a particular purpose.
This restriction may be imposed externally by the donors, by the legal
requirements of the not-for-profit organization, or by the creditors.
Alternatively, the not-for-profit organization can internally restrict
contributions for the purpose that it deems appropriate (also called
designated funds). This restriction usually requires the approval of the
board of directors or governing body.
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Endowment Fund
An endowment fund is a type of restricted fund where, even though funds are
collected, the principal is not allowed to be spent.
The not-for-profit organization is only permitted to use the growth in the funds for
selected purposes.
Many not-for-profit organizations may have a great deal of assets but they are
“cash poor.” This may be a result of the endowment funds not earning a sufficient
return to manage operations.
Endowment funds can be the best way to ensure the long-term viability of the notfor-profit organization. As the endowment grows, the annual allocation to income
will also increase (the organization must determine the best possible way to
maximize the return on those investments and limit the risk of loss or cash
shortage).
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Capital Asset Fund
A capital asset fund is another type of restricted fund, which is used for the
acquisition and maintenance of capital assets.
The above are types of funds that any given not-for-profit organization may
select. The NPO is not required to disaggregate based on these funds nor is
it restricted to only these types of funds. It is up to the not-for-profit
organization to determine the best way to convey information to the user.
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Related party transactions
Identified as related parties based on relevant accounting framework
Similar considerations for control, joint control and significant influence
Economic interest
Entity holds resources for the benefit of other entity
Entity responsible for the liabilities of other entity
An NPO has obtained a long term financing from a bank. XYZ (which is also a
minor donor of the NPO), has provided an unconditional guarantee to the
bank for the above loan
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Conclusion
Private not-for-profit organizations are required to follow proposed
standard for NPOs, and it must also adopt IFRSs, FRS-ME or FRS-SE (as
applicable) for all issues not covered in proposed standard for NPOs.
All not-for-profit organizations should apply similar accounting treatments
to like transactions when the needs of the users are aligned.
Revenue recognition criteria mirror those of profit-oriented entities except
for contributions.
A not-for-profit organization may disaggregate its financial statements into
funds based on its legal, contractual, or voluntary actions.
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End of Presentation
Thank you…
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