Help is at hand for not-for-profits

Not-for-profit organisations (NFPs), defined as, ‘entities whose principal objective is not the generation of profit’, play an important part in Australia’s economy. It is widely held that there are 700,000 NFPs in Australia, most of which are small and entirely dependent on the voluntary commitment of members.

The Australian Bureau of Statistics figures have shown that taxpayers donate hundreds of millions of dollars to a range of organisations with tax deductibility status every year. The people who donate money or time to, and buy goods and services from, NFPs may not have the opportunity to see how their contribution is used, other than through the annual reports of an organisation, which include the financial report.

Annual reports, therefore, play a considerable role in helping not-for-profit organisations communicate their achievements, demonstrate where they have made a difference and let philanthropists and other stakeholders know how their contributions are being used.

NFPs are also faced with a myriad of legislation that they are expected to understand and comply with, including tax legislation, occupational health and safety issues, environmental legislation, corporate governance and so on. This is because today’s corporate reporting environment has changed considerably with the introduction of Australian Equivalents to International Financial Reporting Standards (AIFRS) and a growing focus on corporate governance, including auditing standards now having the force of law.

The decision by the Australian Accounting Standards Board (AASB) to continue with sector neutral accounting standards when introducing AIFRS has added a layer of complexity in how NFPs report. As part of the convergence process the AASB has included special requirements for NFPs in the new standards to allow for this sector’s special needs.

With the International Financial Reporting Standards (IFRS) originally designed for for-profit organisations and with Australia not having a set of specifically designed set of accounting standards for NFPs, there has been an increase in cost and complexity for NFPs which has created some uncertainty about NFP reporting requirements.

The AASB is currently engaged in a project to improve guidance for not-for-profit entities and is working towards addressing the specific financial reporting needs of these groups. The board has also published a paper identifying all the NFP requirements that are contained in the standards and explaining the reasons for their existence.

In 2006, the Institute of Chartered Accountants in Australia reviewed NFP annual/financial reports in a leadership report Not-for-profit sector reporting: a research project. The report assessed the transparency of governance practices and the completeness and clarity of annual reports. It was generally found that sporting and NFP organisations required substantial improvement to their financial and annual reporting.

A second report was produced in February 2007, Enhancing not-for-profit annual and financial reporting, providing more in-depth practical guidance to help NFPs prepare and present annual and financial reports. The report outlined how enhancements for annual and financial reporting detailed in the first report may be implemented. It also provided an overview of legislation and resources and how to meet reporting obligations.

With many of Australia’s NFP organisations being entirely dependent on the voluntary commitment of members of the community, the report provides the tools to produce annual and financial reports that are accountable and transparent in their operations and disclosures.

Transparency is of critical importance to the NFP sector. It allows donors to make informed decisions about who they give to. It also helps keep staff and volunteers motivated, it lets directors demonstrate their organisations’ integrity, and it helps build confidence among an often cynical public.

Another area that NFPs should consider is online reporting, which also includes the electronic distribution of reports. This trend is gaining momentum among many NFPs. However it is fundamental for organisations to continue to manage and update the content of their websites.

By implementing a policy that ensures a regular review, stakeholders are guaranteed that the information they are reading is current and complete. Organisations should provide the most current annual reports and financial statements on their website, not forgetting historical reports which should also be downloadable.

Moving forward, the Institute is continuing its work with the standard setters and regulators in achieving the best outcomes for the NFP sector. This includes participating in the AASB’s consultation processes on ITC14 Proposed Definition and Guidance for Not for Profit Entities and on the proposed IFRS standard for small and medium entities.

The Institute will focus on how these standards might affect NFPs and on the Treasury’s consultation process on unlisted public companies, which focussed largely on companies limited by guarantee.

The Institute has also prepared a submission on the proposed changes to the NSW Incorporated Associations Legislation. The Institute believes that it is time the Australian Government had a simple and consistent national approach to the NFP sector, so that NFPs can devote their precious resources to their core activities rather than compliance.

Kerry Hicks is the head of reporting at the Institute of Chartered Accountants Australia.