NOT-FOR-PROFIT ORGANIZATIONS
Presented by:
Usman Tahir Farooqi, ACA
Director, Advisory Services
Anjum Asim Shahid Rahman
February 06, 2015
ICAP House, Lahore
Table of Contents
Introduction and Background
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07
General Framework
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Specific Framework
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Inventories
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18
Strategic Investments
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Contribution
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Fund Accounting
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Charities / Foundations
Welfare organizations
Institutions
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Annual Revenue
Framework
Large Sized
IFRS (IASB)
Medium Sized
Small Sized
Micro
(ASC/Committee)
has
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.
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General Framework
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Specific contents
Underlying Assumptions
Going concern
Accrual basis
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of financial position
Description of assets and liabilities similar to profit oriented entities
No shareholders
May present
Statement
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Total net
The
Statement
of cash flows
The
Cash from
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 organizations
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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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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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.
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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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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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.
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End of Presentation
Thank you
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