09
Mar
10

IFRS questions for Not-for-Profits

Over the last five years momentum has steadily built for convergence of US GAAP and International Financial Reporting Standards (IFRS and IAS). Over the last two years the SEC has spoken openly about potentially requiring public companies to adopt IFRS in the future. Because I work for an international Christian relief and development organization, I find myself particularly interested in the future of IFRS in the United States. As a result, over the last several years I have sought out IFRS related CPE hoping to answer three basic questions: Will IFRS be required or expected of US based not-for-profits? If so, when? How would IFRS be different for not-for-profits? Here are my current thoughts:

Will IFRS be required or expected of US based not-for-profits?

It certainly appears very likely that the SEC will eventually adopt IFRS for public companies. The appeal of global comparability appears to be stronger then the remaining uncertainties, and challenges. Things can certainly change however. I’m sure we can all think of promised changes that never quite came to fruition. (The metric system comes to mind).  But if I worked for a public company, I would probably be planning on converting to IFRS in the future.

Not-for-profits and private companies are obviously not bound by SEC requirements. However the expectation is that market forces will move most companies and organizations to IFRS. You can see this today with the use of US GAAP. Certainly organizations can choose to report on a cash basis, or some other comprehensive basis of accounting. But, expectations from banks, investors, and/or donors tend to push organizations to report in US GAAP.

When would it happen?

Just this last week the SEC revised their expected timeline for converting to IFRS. (Click here for more info). This new timeline has public companies converting to IFRS no earlier than 2015. I would expect not-for-profits to start converting within a couple years of this date. So, if you are not a fan of change, the good news is that we are probably 6-8 years away from wide not-for-profit adoption of IFRS in the US. (I’ll pause while we all calculate if we’ll be retired by then . . . darn).

One other factor to consider is that organizations may have donor imposed reporting requirements which refer specifically to US GAAP. I think this is currently the case with USAID, and probably other grant making organizations as well. I expect donors and grant makers will amend their reporting requirements as IFRS are more common in the US, but this probably won’t happen until after the SEC requires IFRS for public companies.

What are the differences? What would it look like for me?

In my experience most training classes on IFRS leaves me asking these final two questions. It is fairly easy to forecast when the nation might convert to IFRS. However, each industry and organization is different and so we all seem to be concerned about different things. Certainly there are differences in many areas (inventory, leases, business combinations, etc) and there are convergence projects in process. If you are particularly interested in these Matthew Lamoreaux has an article on convergence on page 24 of the March 2010 Journal of Accountancy.  For now, it is my personal belief that it is best to let the dust settle over the next several years. When it becomes clear that my organization will be converting to IFRS in the near future (18 to 24 months) I can dig deep into known differences and how we will handle them. Until then, the list of differences will likely change, and hopefully get smaller.

However, our industry has a large and unique difference between US GAAP and IFRS which is unlikely to change or be “converged”. This difference of course is fund accounting. IFRS and international accounting standards have no equivalent guidance to FAS 116 & 117. International accounting standards to not address temporary or permanently restricted donations or net asset classes, nor does IFRS offer any specific not-for-profit guidance.

This is consistent with the nature of international accounting standards. IFRS are principled based and seek to avoid industry specific guidance. By contrast US GAAP has often issued industry specific guidance for industries from oil & natural gas to movie producers. Under IFRS there will be a lot of room for exercising professional judgment where there used to be specific GAAP requirements.

Fortunately there may be a potential solution. IAS 8 offers guidance for what to do if a specific transaction of circumstance is not addressed in the existing international accounting standards. (I encourage you to look up IAS 8 and other standards here). You will need to register with IASB for free). IAS 8 encourages financial statement preparers to use professional judgment to provide information that is relevant to the users of the financial statements. In doing so, professionals can refer to guidance from other standard setting bodies with similar frameworks. In other words, if IFRS doesn’t cover a topic you can refer to US GAAP.  (I warn you that IAS 8 is the only IAS that I can currently quote, so I’m sure our industry will need to validate this conclusion as we review all IAS & IFRS prior to conversion).

However this is a double edged sword! On one hand, it means that if not-for-profits believe that the framework outlined in FAS 116 & 117 provides the best information available to donors, we can choose to continue to report this information to our donors. I personally think this is very valuable information and would encourage not-for-profits to continue fund accounting as/where it is complementary to IFRS.  On the other hand, it is almost certain that other not-for-profits, particularly from other countries will not voluntarily adopt the fund accounting concept. In fact, I work with many international not-for-profit offices; many of these use IFRS, and I am not aware of one who utilizes fund accounting as we know it in the US. It will be interesting to see if the various “flavors” of IFRS are an improvement on the separate sets of standards we use now.

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10 Responses to “IFRS questions for Not-for-Profits”


  1. 1 Jenn
    March 9, 2010 at 5:44 pm

    The unique reporting structure for the non-profit industry seems a significant barrier to overcome. I’m interested to see how this shapes up as the future of private company financial reporting evolves.

  2. 2 jonathanferguson
    March 9, 2010 at 8:22 pm

    I know that some of the international not-for-profits I work with are struggling with questions about how to account for gifts restricted by a donor for a specific purpose. I have seen financial statements where these were treated as deferred revenue or some form of contingent liability. The liability question was clarified/resolved by FAS 116 & 117 in US GAAP, however outside the US, this debate is still open.

  3. 3 Carol
    March 11, 2010 at 12:07 am

    A agree with Jenn. Human nature being what it is, no matter the physical location, will always follow the path of least resistance.

  4. 4 BAkr
    February 3, 2011 at 3:55 pm

    If we talk about the case of Malaysia. They announce 1-jan-2012 as the timeline for implementing IFRS. However, they have many Islamic institutions and there are conflicts between Islamic finance and IFRS.. how can they solve this issue as they only have 11 months left to the timeline

    Anyone have any idea?

    thanks

    • 5 jonathanferguson
      February 3, 2011 at 7:29 pm

      Wow, that is a good question! I won’t pretend that I have a complete answer to that, but hopefully your question will generate some other comments as well. I do know that some countries have adopted IFRS with specific exceptions. For example China has converged toward IFRS but still has certain differences. This could be a direction that Malaysia goes.

      There are advantages and disadvantages to this approach. First, it is presumably closer to the global standard of IFRS than current Malaysia accounting guidance. If so, moving to a modified IFRS would at least grant some of the benefits of international transparency. However, having a national flavor/version of IFRS is remarkably similar to having unique national accounting guidance. The differences from global reporting may be smaller, but there is still a reconciliation needed.

      Perhaps IFRS could be adopted for large/public companies. This would allow those competing globally to benefit from global accounting standards and comparability, while not imposing the standards on smaller firms who are less equipped to manage the change, and who receive less of the benefit of global standardization because they only compete locally.

  5. 6 Edward Finch
    October 17, 2012 at 6:34 pm

    I know this is an old article but I am researching IFRS and not for profits for application accross a global charity. We have at least one example reported on in the UK of a global organisation adapting IFRS for not for profits (and have been doing since 2006) see ActionAid International. The underlying accounting is very closely modelled on the UK Statement of Recommended Practice (SORP) on charity accounting…


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