Non-profit organisations are organisations that are prohibited by law from distributing profits to their members or officers. They are usually organised and operated for educational, social, professional, religious, charitable or any other non-profit purposes. Globally, there is a paradigm shift in the governance and accountability processes of organisations including non-profit organisations as they are equally corporate citizens just like other profit making corporate entities. Moreover, because non-profit organisations usually source for funds externally, it behoves them to keep accurate records and meet disclosure requirements expected of them either from the regulators or their sponsors. Financial reporting is a key component of good governance in any organisation. Accountability is all the more important in every sector of the economy as Nigeria is making a lot of effort to address the issue of money laundering in the country and also generate more income from taxation. In a bid to standardize the practice of financial reporting and accounting by non-profit organisations in Nigeria, the Financial Reporting Council (FRC) of Nigeria has drawn up a guide for preparing financial reports and accounts for these institutions.
The Financial Reporting Council (FRC) of Nigeria is a federal government agency established by the Financial Reporting Council Act, No. 6, 2011 and under the supervision of the Federal Ministry of Trade & Investment. The FRC is responsible for, among other things, developing and publishing of financial reporting standards to be observed in the preparation of financial statements of public entities in Nigeria; and for related matters. Some of the Council’s main objectives are to: enhance credibility of financial reporting; improve the quality of accountancy, audit services & corporate governance; and to protect the interests of investors and other stakeholder. In line with the powers conferred on it by the Act, and in a bid to foster accountability in the non-profit sector, the FRC formulated the Statement of Accounting Standards (SAS) No. 32; an accounting system that applies to non-profit organisations in the country including faith based organisations which requires them to report financial transactions periodically with effect from 1st July, 2011. Non-profit organisations are equally expected to comply with the provisions of the International Financial Reporting Standard (IFRS) with effect from 1st January, 2013.
Accounting and reporting standards for Non-Profit Organisations
The Statement of Accounting Standards (SAS) No. 32 prescribes a uniform accounting and financial reporting system, and, among other provisions, stipulates that financial statements for not-profit organisations shall include- statement of accounting policies; statement of financial position; statement of activities (income and expenditure); statement of changes in net assets; statement of cash flows; notes on accounts and five-year financial summary. Presently, the system of accounting and reporting for non-profit entities is not uniform and this makes assessment and comparison cumbersome. Thus the purpose of the new accounting standards is to establish a uniform basis of reporting for non-profit organisations whilst ensuring accountability in the activities of such organisations.
The SAS No. 32 also prescribes that statements of non-profit organisations shall state a clear and concise description of the purpose and activities of the reporting organisation, its legal form and the legal form of other affiliated entities, its relationship with any overseas organisation, its community of service and its status under the income tax regime. No doubt adequate reporting is the first step towards accountability and probity of these organisations and the financial obligations of any organisation can easily be ascertained where there has been proper accounting and reporting as required by law. By S.57 of the Financial Reporting Council Act of 2011, every financial report or statement must comply with the accounting and financial standards developed by the Council. The Act further provides that the accounts, financial reports, annual returns or any other document required to be filed by statute with the other regulatory authorities: Central Bank of Nigeria, Securities & Exchange Commission, Corporate Affairs Commission, Nigerian Investment Promotion Commission, Federal Mortgage Bank of Nigeria, National Pension Commission, and the National Insurance Commission would be adopted by the financial reporting council for that purpose and where there is a conflict in standards, the guidelines of the FRC shall prevail to the extent of the inconsistency. This means that organisations would not be required to prepare any additional reports specifically for the FRC. Thus no additional burden is placed on organisations.
Objective of the policy
The objective of the new policy is to enhance transparency and compliance with internationally recognised standards of financial reporting. Furthermore, it would enable the regulatory authorities to identify those activities that may be assessable for tax purposes. It has been observed that some entities in the non-profit sector engage in commercial activities to generate income. Such activities are not covered by the exemption that non-profit organisations are entitled to by law because they are not charitable activities hence they are liable taxation. The argument put forward by the non-profit organisations is that the totality of their activities is geared towards charitable purposes. However, this is contrary to the intention of the provisions of the law relating to tax exemption which specifically states the activities that qualify for such exemption to cover ecclesiastical, charitable, or educational activities of a public character provided such profits are not derived from a trade or business venture. A proper financial reporting system would address this issue because income that should be subject to tax would be reported, accounted and disclosed as it is done developed countries like the United Kingdom and Singapore.
Failure of any public interest entity to comply with the accounting and financial reporting standards developed by the Financial Reporting Council, which includes the SAS 32 amounts to an offence liable on conviction, to a maximum fine of Ten Million Naira (N10,000,000) or two years imprisonment or both. A public interest entity is defined in the Act as government or government organisation, quoted and unquoted companies and all other organisations required by law to file returns with regulatory authorities; except private companies required to file returns only with the Corporate Affairs Commission and the Inland Revenue Service. Non-profit organisations fall within the category of organisations required to file returns with regulatory authorities therefore they would be liable if they fail to comply with the accounting and financial reporting standards developed by the Council.
The adoption of internationally recognised financial reporting standards and disclosure requirements for non-profit organisations is a step in the right direction to address the issue of tax evasion in the country. It would also boost the efforts of government to tackle the menace of money laundering in the country as the financial system of the non-profit sector would become more transparent. It is imperative that proper enforcement and implementation attend the enactment of laws and formulation of policies in order to ensure compliance and promote good governance and accountability in the non-profit sector.