Accounting Problems faced by NFPs

Introduction
The accounting framework of not for profit organizations is not that much
developed in an association with several other entities of business. This is on
the grounds that the state for the usage of external and internal controls
within the entities are diverse in comparison to those within the private
sector and that no activity is performed by them within the free market. More
than this, there are neither obvious settled goals or ownership interests nor
an authoritative social propensity for productive and effective delivery of the
service, and that the profit is never found to be a great success factor for the
resource management.
Not for profit organizations normally operate in a competitive environment
that is described by the surge in demand for humanitarian services from the
group emulated by the developing of a competition for public and for profit
sector contracts. More than this, the decrease in the volunteer support and a
by and large more tighter source of government financing (Birnberg, 1980).
Moreover, not for profit organizations are presently required to use the
current resources within the organization emulated by the effective
generation of new resources adequately with a specific end goal to develop
new opportunities so that the future organizational environment can be
shaped further.

The uplifted profile of the sector on an international basis in accordance with

the advancements in the regulation linked with the not for profit and the
initialization of IFRS i.e. International Financial Reporting Standards gives an
auspicious chance to take a more extensive perspective of NFP accounting
regulation and regimes in several contexts. It is a true fact that the
development of the relevant financial data needs the foundation of an
accounting regime and framework that perceives the special needs of the
not for profit organizations along with the stakeholders and gives direction
that guides the arrangement of reasonable, understandable and clear
financial reports for not for profit organizations.

Deficiency in the Financial Reporting Practices

There are mainly two different transactions of the not for profit organizations
that highlights the insufficiency of the existing practice associated with the
financial reporting to report reliably and definitively in transit in which a NFP
has released its responsibility for the accomplishment of the mission
(Cordery, Baskerville and Porter, 2011). The global deficiency and diversity of

the activity results from the non availability of a universal conceptual

framework intended to direct the particular organizational reporting needs
that have the essential objective associated with the accomplishment of the
mission instead of a social or profit imperative.
A significant role that volunteers play in the not for profit organizations is
found to be such a situation that is basically not encountered in public sector

or for profit organizations. On a global basis, it is assessed that with an

approximate of one billion individuals every year, they volunteer their time,
at an expected value included of $US1, 348.1 billion. Be that as it may,
presently, the financial reports neglect to exhibit a NFP's responsibility for its
dependence on, and utilization of the volunteers (Crittenden, 2006). Despite
the fact that the contributions of volunteer services create a lot of quality for
not for profit organizations, it is quite clear that the existing conceptual
framework don't take into consideration that not for profit organizations
adequately report on the magnitude of their dependency on the volunteer
worker.
However, on a universal perspective, some constrained reporting for the
services of volunteer is allowed, at the same time, only some not for profit
organizations consider the reporting of the value of services of volunteers in
the financial statements. The direction provided by the ICAA proposes that
the services of volunteer ought to just be perceived as revenue when there is
a fulfillment of three conditions: the provision of the services enhance or
create the current asset; they would somehow be acquired on the off chance
that they were not donated and that they need specialist skills.
Some of the donated services which are normally provided by the individuals
in accordance with their profession or a normal trade emulated by the
commitments of volunteers are found to be quite separated in the UK
Charities Statement of Recommended Practices. It is quite clear that the
donated services are required to be identified as income which is to be

determined at a fair value in accordance with a relating expense, while the

volunteers'

contributions

are

not

to

be

perceived

because

of

the

complications in the measurement (Eisenreich, 2011). With the recognition of

the difficulties in measurements, the Charities statement of recommended
practices in any case fortifies the significance for the readers of the report to
be given 'adequate data to comprehend the contribution and role of
volunteers. As contended by Mook et al. (2007, p. 60), the debarment of
volunteer work from the accounting statements of not for profit organizations
underestimates a valuable ad key resource on which numerous not for profit
organizations depend. The quietude of budgetary reports on volunteering
subsequently points out to a grave insufficiency in the accountability coming
about because of the absence of a not for profit sector associated with a
particular conceptual framework.
Such a silence additionally indicates to a failure of the financial reports to
accomplish the yearnings of the subjective attributes of conceptual
framework of relevance, understandability, comparability and reliability.
Specifically, in accordance with the volunteers' contribution, the non
availability of the information about the critical not for profit resource raises
certain queries about the reliability, relevance, and comparability of the
reports of not for profits arranged under a conceptual framework for for profit
organizations (Miller, 2000). The absence of international standardization and
consistency in the disclosure and recognition of reserves and income will
develop vulnerability about the practice in purview where the specific

accounting regulations associated with NFP are not found, or where such of
the regulations are uncertain for this particular scenario. In such cases, it will
be quite troublesome for the stakeholders to evaluate the degree to which
the organization has made a fulfillment of its designated purpose and
financial obligations. This radiates from the absence of a specific conceptual
framework for the not for profit sector and results in a question as to what
degree the accountability has been illustrated.

Reporting Entity
The reporting entity is found to be a fundamental premise for financial
reporting. The FASB/IASB ED expressed that such entities are a confined area
of economic activities and perceives that the legal entities can possibly be
those reporting entities till they need obstructions to recognize the economic
activity from one other entity. The one and only difficulty within the NPOs is
characterizing the economic boundary. This is on the grounds that almost all
of the entities in the not for profit sector are not included, along these lines
characterizing the boundaries of entities is significantly more troublesome
than if the boundaries are just related particularly to the legal entities. More
than this, the absence of equity ownership is found to be a great issue. The
presence of such items that are held in trust further muddles the definition of
the reporting entity (Shaughnessy, 2010). In the NFP sector, the items in trust
might incorporate monetary amounts or physical items held in a range of
trust accounts.

Revenue Recognition
Some of the core revenue streams in the NFP sector are grants, donations
and contracts along with different contributions. A large portion of such items
are non exchange revenue, i.e., funds obtained when the donor does not
hope to get services or goods consequently of equivalent value. Non
exchange revenue is not given any kind of consideration in IFRS.
Specifically, the distinction between non exchange and exchange revenue
which at first shows up very straightforward is not necessarily found to be
like that. For instance, the funds of sponsorship (possibly a transaction
related to non exchange) may incorporate an element related to exchange,
(for example, the need to give access to programs or staff). Another trouble
is in the area of recognizing and valuing the donated services or items
(SHIMIZU,

2010).

Specifically,

dependability

has

been

organized

over

informational relevance about the donated time, prompting few not for profit
organization reporting such inputs, despite the fact that volunteers are found
to be quite essential to numerous not for profit organizations.
Further, given that all adjustments in the liabilities and assets must go
through the expenditure and revenue statements, when non exchange
revenue is obtained for capital related items, there are critical arguments in
respect to regardless of whether it involves the revenue of the current year.
Such a revenue excess could be confused by clients. In accordance with the
adopted approach, the revenue recognition in one year may not make a

provision of the data to a client as to the possible revenue for the next year,
in this way lessening the usefulness of decision of the General Purpose
Financial Reports.

Assets
IFRS characterizes an asset as a one that is controlled by the entity as a
consequence of previous eevents and from which the economic benefits are
anticipated to make up a flow to the entity within the future (Torres and Pina,
2003). This spotlights on the economic benefit and cash generating unit

which is to be determined from the assets, and is inconsistent to the

explanation behind holding the assets in the not for profit division, as
resources held by NPOs are destined to be held for potential service. In any
case, under IFRS such a choice develops both valuation and disclosure
issues.
Further problems occur with the valuation and recognition of heritage assets
where:
The assets control may be shared (with respect to case, if the not for profit
must tend to a landmark which is promptly open to the general population)
and the control rule may not be met;
The valuation might not fulfill the fundamental ideas of financial reporting
like relevance, reliability and understand-ability.
Costs of getting a fair worth incorporating impairment as well may exceed
the advantages;

Liabilities
In connection to liabilities by and large, and particular issues officially
brought up in the sub sections of assets and revenues, fair and reasonable
presentation keeps on challenging the not for profit organizations, especially
to what extent a potential risk should be followed and the capacity to
recognize when a thing stops to be an obligation.
Direction on the definition of liability is required; particularly in connection to
the revenue being unearned (Travaglini, 2012).This is on the grounds that a
few things may be equity or liabilities. For instance, some of the funds that
are restricted may indicate to a liability (and the restriction may be forced,
either by the outside party because of an endowment, or by conditions
characterized by the not for profit itself when seeking for funds; however
such funds might indicate to a residual equity.

Funds and Equity

Since the accounting equation is found to be quite enigmatic and that the
equity is unrealistic to identify with the governors who don't have any claim
within it, and is from time to time paid straightforwardly to the beneficiaries
regardless of the possibility that it apparently held for their benefit. However,
the residual equity normally does not return back to individuals from a not
for profit organization (on account of a charity this would ordinarily be
unlawful). Where a charity is twisted up, the assets are regularly transferred
to some other charity, so neither the fundamental donors, nor the current
beneficiaries may be the holders of the residual equity in connection to co-

agents. Further, while IFRS characterizes an acquiree and acquirer as far as a

takeover/merger happening in the for profit division, regularly there is no
characterized acquirer in NPO mergers. On the other hand, it is frequently
the case that the not for profit equity includes various funds subject to
diverse conditions as an outcome of donations or grants obtained on trust for
some particular purposes. The utilization of the fund accounting helps the
stewardship goal of financial reporting, as it permits funders and donors to
track their inputs through the accounting associated with equity. It is viewed
as imperative to clients, yet it may decrease transparency as clients normally
see that the collected and accumulated funds are the resources accessible
for the objectives of entity.

Conceptual Framework for NFPs

The IASB is putting in endeavors to develop the standards for NFPs in
accordance with a conceptual framework of the usefulness of decision.
Hence it leave the not for profit organization with no suitable conceptual
framework under which there can be a development of the accounting
practice. This results in various questions and challenges. A key issue is the
sector's diversity, incorporating as it does organizations that range from
health care organizations to charities, trade associations, educational
institutions and some more. In accordance with the diversity, a question
arises as to who would be developing a conceptual framework for NFP?

Would this be the responsibility of the IASB, which has mainly considered the
issues of not for profit organization within its dynamic plan, or another
international body should be be framed to address the sector's needs?

Stewardship
Simply remodeling the existing conceptual framework disregards the social,
economic and political effect of the not for profit sector and squanders the
potential that financial reporting can make to the sustainability of the sector
and to the well being of the society. The not for profit sector requires a
conceptual framework that is reconstructed taking into account bolstering of
the encompassing the stewardship, yet not barring the usefulness of the
decision. Stewardship incorporates the obligation to take care of the interests
of others emulated by a concern with the aspects that are explored to be
merely economic. Henceforth, the steward is in this manner in a trust
relationship, where "there is an obligation of devotion and diligence in the
resource administration. This perspective offers a wide origination of
stewardship (Ali, 2012).
In accordance with the context of such debate, the motivation behind this
paper is found to be a three fold. In the first place, it distinguishes the path in
which an approach that is stewardship can improve the manageability of the
sector associated with not for profit (NFP). Second, it contends for a different
financial reporting conceptual framework for not for profit, in light of the
foundation for stewardship (Shaughnessy, 2010). Third, it shows the capability

of a stewardship way to deal with resolution of some issues related to

financial reporting particular to the sector related to not for profit.
This paper fills the significant gap, by belligerence for a framework related to
financing reporting in view of the idea of "stewardship". At present,
stewardship, or "the management responsibility for the resources that are
endowed to it, is enveloped within a perspective of decision usefulness, and
therefore, the potentiality is limited. One example could be that within
Australia, the board of AASB, not for profit entity's disclosure by the private
sector, recognizes that the stakeholders of not for profit require distinctive
information to shareholders in the business division, and proposes including
both numeric and narrative reporting.

However, it accepts the predominant decision usefulness paradigm and,

aside from a precise reference to the obligations of the accountability of
private entities for not for profit organizations, does not suggest the potential
role

of

financial

reporting

to

add

to

the

sector's

sustainability.

reconstructed framework of financial reporting where the foundation of

conceptual framework depends on the offers of stewardship in accordance
with the potentiality for the regime of financial reporting that can help with
the achievement and assessment of the sustainability of not for profit
(Shaughnessy, 2010).

A conceptual framework in view of a stewardship will uncover the capability

of the potentiality of financial reporting so as to incorporate retrospective,
prospective, non financial, financial and narrative information. This will
permit the organizations related to not for profit organizations to report
against their central goal to illustrate the fulfillment of their stewardship
commitments and improve the sustainability reporting.

Conclusion
In the event that accounting is to understand its potential in adding to an
evaluation of stewardship and to the improvement of the sustainability of not
for profit, then accounting system for organization need to give data that is
significant to this sector. As financial reports are an essential data source
about the not for profit organizations' activities, any imperfections or
exclusions in the path in which current practices of accounting does or does
not represent issues that are special to the area would demonstrate that
financial reporting is not as of now satisfying its potential. By method for
instance, the discussion concentrates on two issues of not for profit
organizations. Initially, the issue of how the contributions are at present
reported is analyzed, and besides, the issue of contributions of volunteer,
which are not right now incorporated into financial reports, is raised. Such
examples highlight the inadequacies of current financial reporting practice to
report genuinely on the not for profit activities, the way it has released its
stewardship obligations, and whether its activities are economical.

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