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What to expect from the new NFP accounting standard

Explainer: why the changes to accounting standards matter to the not-for-profit and charity sector

From January 1 2019, a new standard in financial reporting will become mandatory for not-for-profits and charity organisations. These new accounting standards will improve transparency via a more accurate picture of economic reality and will enable donors, volunteers, employees and the public to make informed decisions.

The new standard, introduced by the Australian Accounting Standards Board (AASB), will majorly change how NFPs recognise and disclose income, volunteer services and donated goods.

Revenue and Income

Australian charities receive over $140 billion in revenue each year, with main sources being membership fees, sales and paid users (50%), government grants (43%) and donations and bequests (7%).

Under the new standard, organisation will have greater disclosure, transparency and accountability of funds. It endorses the disclosure of up-front revenue, including the application and joining fees, and grants that have “attached conditions, requirements or restrictions” as separate items rather than under one umbrella revenue item.

Additionally, the standard prescribes specific disclosure requirements associated with some types of grants – including grants for the construction or acquisitions of assets. For instance, grants received to acquire a specific asset are recognised and reported as income when the asset is actually acquired.

As such, high revenue inflows and surpluses in one year followed by high outflows and deficits in another would become less likely. Surpluses in one period followed by deficits in another can send confusing signals to donors, volunteers, employees, taxpayers and the general public.

While the standard allows discretion of NFPs in terms of the level of detail they include when they are disclosing income and revenue, it encourages these organisations to report income into specific categories – including grants, bequests, donations and volunteer services. This detail is needed to improve disclosures and transparency, and eventually, trust and confidence in the sector.

Donated Goods

Disclosures that pertain to any donated inventories, goods and assets are primary to knowing the amount of resources that an NFP receives. Yet these disclosures have long been mandated.

The new standard recommends disclosures of the value of all assets required, which include assets that have been received at significantly low or nil value. Many NFPs receive support in the form of in-kind goods and donated assets, and yet this support is not reported within financial reports.

Even though the standard does not impose disclosures of negligible amounts of donated goods within financial statements, it endorses disclosures of the nature of these donations.

In 2016, Australian charities reported nearly AU$200 billion in total assets. The recognition of donated assets, goods and inventories will increase the total amount of reported assets controlled by the sector and provide a more realistic view of the resources that have been received by the sector.

Therefore, the disclosures of donated goods are fundamental to transparency and accountability within the sector and to people’s confidence and trust in NFPs.

Volunteer Services

Further, the new standard encourages NFPs to recognise the value of their volunteer services as a form of income, particularly in cases where these services would have been purchased had they not been voluntarily provided and where the fair value of these services can be reliably measured.

Australian charities receive the support of around three million volunteers each year, representing 328 million unpaid volunteer hours and around AU$12.8 billion in wages. Over 80 per cent of our 52,000 charities use volunteers to achieve their social mission.

Recognising the value of these volunteer services as a form of income would be more reflective of the economic reality of NFPs and would facilitate informed decisions by volunteers, employees and the general public in terms of which organisation(s) they would like to allocate their time to.

It’s a good start, but more changes are needed!

The new standard applicable to NFPs brings paramount changes to the way the sector reports its income and revenue, donated goods and volunteer services. These changes would improve disclosure, transparency and accountability.

Although this is a good start, donors, volunteers, employers, tax payers and the general public also need improved disclosures, transparency and accountability of the expenditures undertaken by NFPs in achieving their social mission.

 

Ushi Ghoorah is an Associate Lecturer at Western Sydney University’s School of Business. Ushi researches disclosures in the NFP space and specialises in the financial disclosures, governance and accountability of NFPs.

 Ushi has a PhD which examined ‘Factors influencing the extent of accounting disclosures made in the annual reports of publicly reporting Australian not-for-profit organisations’. Her current research projects include exploring people’s perceptions to the financial disclosures, the influence of various factors on financial disclosures and the relationship between governance boards and financial transparency of Australian NFP organisations.

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