September 30, 2022

Financial Reporting Standard for Not-for-Profit Entities

Personal finance

Financial Reporting Standard for Not-for-Profit Entities


Non-profit organizations in Kenya are registered either as NGOs under the Co-ordination of Non-Governmental Organizations Act (Cap 19) of 1990 or as Companies Limited by Guarantee under the Act Companies Act 2015, either as trusts under the Trustees (Perpetual Succession) Act, Companies governed by the Companies, Co-operatives and Trade Unions Act or Community Organizations under the Ministry of Women and Children Affairs .

The common denominator for most nonprofit organizations is that these organizations are funded by donors either directly or through parent entities and also have a broad stakeholder base, including the communities for the benefit of which they operate.

The main laws governing NPOs depending on the nature of the entity include the Companies Act 2015, the Income Tax Act and the Co-ordination of Non-Governmental Organizations (Chapter 19) Act 1990, which require NPOs to prepare annual financial statements in accordance with international financial standards. Reporting standards (IFRS).

The Institute of Chartered Accountants of Kenya (ICPAK) recognizes both IFRS and the International Financial Reporting Standard for Small and Medium Entities (IFRS for SMEs) as acceptable frameworks for the preparation of financial statements for general use.

IFRSs and IFRSs for SMEs are written with a focus on the information needs of stakeholders of private for-profit entities.

The main difference between for-profit and non-profit organizations is that NPOs depend on donor funding while for-profit organizations generate their own revenue. These standards do not contain specific guidance for some of the unique transactions related to accounting for donor funds and related expenditures.

For example, accounting for grants and donations, as well as in-kind donations and services and accounting for assets held for the provision of future services pose challenges for many NPOs.

Other jurisdictions such as the UK, US, Australia, New Zealand and Canada have attempted to meet the financial reporting needs of NPOs by issuing national standards and guidelines specific.

UK regulators have developed financial reporting (FRS 102) for entities that do not apply IFRS. In the UK, this takes the form of a statement of best practice developed for charities.

It covers, among other nuances, accounting for restricted and unrestricted donor funds, accounting for funds, including guidelines on transfers between funds, accounting for grant commitments, and the most important recognition of expenses.

It also provides additional guidance on when to recognize conditional grants. In the United States, the codification of accounting standards includes specific standards for NPOs.

The absence of a relevant and standardized accounting framework for NPOs compromises the consistency and usefulness of financial reports as well as the ease of preparation of these financial reports.

Some of the key relevant areas that need to be addressed relate to accounting for restricted funds, deferred revenue, grants receivable, inventory held for distribution or consumables, project goods and equipment and related grant revenue and funding. subrecipients.

There is also a need to have a standardized format for the presentation of financial statements that is specifically relevant to NPOs rather than adopting the guidelines that have been established for a completely different category of stakeholders in private entities incorporated for lucrative.

On the international scene, there is currently a collaborative initiative to develop the first applicable global financial reporting guidelines for NPOs, called IFR4NPO.

The project is currently in the consultation stage where various questions, proposals and alternatives have been raised for public comment and is expected to release a guide in 2025. The NGO Board and ICPAK may coordinate the initiative with a view to ensure single reporting the challenges of NPOs in Kenya are taken into account in the final standard.