If you want to see international nonprofit auditors get excited, you could do worse than ask them to talk about two less-than-sexy-sounding terms: IFR4NPO, and INPAG.
The first set of initials stands for International Financial Reporting for Non-Profit Organizations, a project jointly run by two nonprofits focused on back office costs, Humentum and the Chartered Institute of Public Finance and Accountancy. The second stands for International Non-Profit Accounting Guidance — a set of rules currently in development, as was announced just last week. Both are to do with setting a common set of rules to govern nonprofit accounts.
This may sound dull. But it’s also important.
This is because when donors give money to nonprofits in other countries, they need to be able to trust that those organizations are solvent, honest, and able to deliver what’s needed. One of the best ways to do that is to look at the accounts.
As a result, accounts have become extremely important to NGOs. The sector tends not to be heavily regulated — even in the United States and Europe the typical budget allocated to nonprofit regulation is less than a dollar a day for each organization, and budgets are tiny compared to other sectors that exist for the public good, such as health and education.
And unlike in other sectors, there are no shareholders or voters with the power to intervene if things go wrong. So nonprofit accounts have become a hugely important accountability tool. Large nonprofits have annual reports and accounts comparable in length to some publicly listed companies, sometimes running to well over 100 pages.
But to use these tools effectively, you have to be able to read the accounts and trust what they say. If you don’t know what rules were being followed by the people who drew up the accounts, how much can you trust them?
The status quo
Right now, in most countries, there is no bespoke standard for nonprofit accounts, which means each set of figures is produced using rules designed to cover for-profit entities. These rules don’t work well for nonprofits. They focus on the needs of investors, shareholders, and owners, none of which nonprofits have. They can have difficulty with the idea of a gift — what accountants call a nonexchange transaction — and they often don’t talk about how to account for restricted funds.
Even countries that do have bespoke nonprofit standards have not come together to align, so those standards don’t look the same from country to country. British nonprofit accounts will look different from U.S. accounts or from Japanese accounts.
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So the situation is not clear. To remedy this, nonprofits, standard-setters, and financial professionals in many different countries have collaborated on a long-running initiative, IFR4NPO, intended to create a set of rules designed for nonprofits, which can apply to everyone in the world.
Setting the rules
INPAG, once it’s ready, is intended to act as that common set of rules.
It will be based on an existing set of standard rules for small- and medium-sized for-profit companies around the world, known as the International Financial Reporting Standards for Small and Medium Entities for SMEs.
INPAG will be standalone guidance, meaning that people who prepare and audit accounts will be able to use just this document, rather than having to look at the IFRS for SMEs guidance and cross-check.
The timeline
The process has already taken the best part of a decade, with the first survey on the subject dating back to 2014, when 72% of respondents from 179 countries backed the need for an international nonprofit accounting standard.
The next step will see the production of draft guidance, known as an exposure draft, on Nov. 21, which will be released at the World Congress of Accountants and will then be subject to comments and revisions. More exposure drafts will follow in later years.
The goal is to have guidance ready by 2025.
This may be optimistic. When it comes to accounting guidance, the date at which it will be ready tends to recede into the future almost as fast as the future rushes to meet it. But so far, the project has been kept on track.
Eventually, the guidance will be ready, and then it will have to be adopted by all the various countries and their standard-setters. Right now, rounds of lobbying are taking place to ensure this happens, among nonprofit organizations and the various organizations that will assess compliance with the rules, such as auditors and each country’s governing body — its accounting standards board, or financial reporting council, where these exist.
So far, that’s not guaranteed, but the prospects look reasonable. The International Accounting Standards Board, which oversees these processes and sets IFRS guidance, has been supportive.
An international standard is still most likely some years away. The target is to have 10 countries adopt the guidance by 2030.
“This may seem slow, but don’t be fooled,” says Samantha Musoke, project director of IFR4NPO. “In accountancy terms, this is Formula One.”
About the author
David Ainsworth@daveainsworth4
David Ainsworth is business editor at Devex, where he writes about finance and funding issues for development institutions. He was previously a senior writer and editor for magazines specializing in nonprofits in the U.K. and worked as a policy and communications specialist in the nonprofit sector for a number of years. His team specializes in understanding reports and data and what it teaches us about how development functions.
