More than 119 countries have adopted the International Financial Reporting Standards (IFRS) since their introduction as a global reporting framework by the International Accounting Standards Board (IASB) in 2001.
The primary goal of the IASB in developing the IFRS framework was to provide a single set of global financial reporting standards that would satisfy the financial reporting needs of listed corporates operating in capital markets.
As a universal financial reporting language, IFRS has been particularly attractive for large corporates wanting to tell their financial story in a meaningful and comparable way to investors and trading partners. The uptake of IFRS as a global financial reporting framework has led to the question of whether there is a need for a similar global financial reporting framework that can apply to not-for-profit (NFP) entities around the world.
There are some very large NFPs that may benefit from a global financial reporting framework. A few countries, such as Australia, have adapted IFRS for application to the NFP sector. However, the numbers of these entities are nowhere near their corporate equivalents operating in the global capital markets. This raises questions about the level of demand for such a framework and whether or not the resources needed to develop a fit for purpose global financial reporting framework for NFPs would be justified by the perceived benefits.
The majority of NFPs are small local organisations focused on activities within their own jurisdiction. To illustrate the point we can look to data provided on the Australian market by the Australian Charities and Not-for-profits Commission. According to its Australian Charities Report 2014 only 130 out of 37,227 charities have revenue over $100m (AUD). A further 1,234 charities have revenue exceeding $10m, whilst there are 4,484 charities with revenue of more than $1m. That’s 85 per cent of charities in Australia with revenue less than $1m.
The pertinent question is does financial reporting provide all the necessary information NFP stakeholders are looking for? Unlike entities that exist to generate profits and a return for investors, NFPs often focus on providing benefits to members, beneficiaries and other stakeholders.
Standardised financial reporting frameworks may introduce consistency and comparability to the NFP sector, however this may not always solve all users’ information needs. For example funding providers are often interested in specific activities or projects of a NFP, particularly those activities or projects they fund. An entity-level financial report may not always meet the needs of these stakeholders.
In determining the need for a global financial reporting framework for NFPs we need to be cognisant of the attributes unique to the NFP sector and require an understanding of the users of NFP financial reports. Do they need a universal financial language to better understand the financial metrics of NFPs? Will financial reporting tell the whole story, or do we need something more than a financial reporting framework? How do we address the specific information needs of different users, such as funding providers, within a generic reporting framework and who will be responsible for the setting of such a framework?
Obtaining reliable evidence to answer these questions will assist us in determining the right reporting solutions to provide the most relevant and useful information likely to benefit NFP stakeholders.
Measuring and reporting the non-financial performance of NFPs is equally, if not more important, than the provision of information relating to financial performance. The evolution of reporting beyond financial metrics is gathering pace with the emergence of reporting frameworks such as Integrated Reporting <IR>, which focuses on the reporting of value creation across six capitals – financial, manufactured, intellectual, human, social and relationship, and natural.
The stated objective of the <IR> framework is that it “is written primarily in the context of private sector, for-profit companies of any size but it can also be applied and adapted as necessary by public sector and not-for-profit organizations”.
Exploring the <IR> framework’s applicability to the NFP sector and its capacity to address the unique attributes of NFP organisations is something well worth further endeavour.
Alex Malley is chief executive of CPA Australia