| Summary: | Not-for-profit organisations, and thus the congregations and welfare organisations of the
Dutch Reformed Church in the Free State, exhibit certain unique characteristics, different
from businesses. In essence, the primary objective of not-for-profit organisations is not to
realise a profit to be distributed to equity participants (e.g. shareholders), but to meet
certain religious, cultural, social and other non-commercial needs of the community.
Not-for-profit organisationsâ need for relevant accounting standards in fact emanates from
their unique characteristics.
Owing to the nature of not-for-profit organisations, the users of their financial statements
require information (financial and non-financial) which is different from the information
required by users of financial statements of businesses. Financial reporting which makes it
possible for the users of financial statements of not-for-profit organisations to assess the
stewardship of the organisationâs management, is the central focus because management
are accountable to the members of the organisation, and also especially to donors.
Standards of Generally Accepted Accounting Practice (GAAP) are drawn up primarily for
businesses, and specifically to enable users of financial statements of companies in the
international capital markets, to make economic decisions. Given this fact, and the unique
nature and characteristics of not-for-profit organisations, it follows that Standards of GAAP
are neither relevant nor appropriate in the case of not-for-profit organisations. Standards of
GAAP therefore cannot be applied indiscriminately to not-for-profit organisations, albeit that
appropriate South African legislation (Nonprofit Organisations Act) probably requires
compliance with Standards of GAAP. In the international accounting environment, attempts
have been made to develop unique accounting standards for small- and medium-sized
entities, while unique accounting standards have also been drawn up for government
institutions on the basis of their unique accounting needs. The same approach should also
be followed for not-for-profit organisations since their unique nature and characteristics also
necessitate typical accounting standards. Where not-for-profit organisations do indeed attempt to apply Standards of GAAP, they
nonetheless experience problems in this regard. Some of these problems derive from the
theoretical irrelevance of Standards of GAAP, while other problems are of a more practical
nature. The fundamental problem derives from the question whether the cash or the accrual
basis is the most appropriate in the case of not-for-profit organisations. Moreover, âfund
accountingâ is typical of not-for-profit organisations; however, an accounting standard for
treatment of âfundsâ does not exist. In addition, various problems are also experienced with
the recognition of assets, impairments and depreciation of assets, because the definition of
âassetsâ and the recognition criteria do not consider the unique nature of not-for-profit
organisations.
Various questions exist with respect to the recognitio n of receipts as income. The question
in particular is whether donations received for a specific purpose, donations which may only
be utilised in future periods, as well as capital donations, should be recorded as income,
liabilities or directly as funds. Not-for-profit organisations also experience problems with the
recognition of so-called âin naturaâ receipts, and other forms of income. Given the nature
and characteristics of not-for-profit organisations, performance reporting is also problematic
because the âprofit figureâ and other reported financial information often do not capture the
real âperformanceâ (i.e. the achievement of objectives) of not-for-profit organisations.
Furthermore, certain terminologies in GAAP are also not applicable to not-for-profit
organisations.
In some countries, accounting standards have been developed and issued specifically for
not-for-profit organisations. The standards issued by the United States of America , the
United Kingdom, Canada and Australia have been analyse d and compared to establish
appropriate accounting principles for not-for-profit organisations. Accounting practice,
applied in the above-mentioned countries, was reviewed by means of empirical tests among
congregations and welfare organisations of the Dutch Reformed Church in the Free State. Specific aspects that were addressed and which have led to proposals for typical standards
of generally accepted accounting practice for not-for-profit organisations are the following:
· Presentation of financial statements;
· Reporting on the restrictions imposed by donors on the utilisation of funds;
· Accounting in terms of a cash basis versus the accrual basis ;
· Recognition and measurement of fixed assets and accompanying expenses, such as
depreciation and impairments, as well as the recognition and measurement of inventory;
· Recognition and measurement of income in general, and in particular, recognition of
donations and contributions, ârestricted donations receivedâ, and donations âin naturaâ;
· Performance reporting by not-for-profit organisations; and
· Aspects related to fund accounting.
The core recommendations derive from the position that existing and formal Standards of
GAAP should be used as a basis, and these standards should be modified to deal with the
typical accounting concerns that pertain to not-for-profit organisations. The accounting
profession, not-for-profit organisations, and other stakeholders must take note of the
irrelevance of GAAP for not-for-profit organisations, the accounting problems experienced in
the context, as well as the need for, and the recommendations made with respect to typical
accounting standards for not-for-profit organisations. Like some other countries, South
Africa should also play an active role in developing accounting standards which are
applicable and relevant to not-for-profit organisations.
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