Accounting Problems Faced by Not for Profit Organizations (nfp)

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.