Fund accounting is the practice of managing resources that have restrictions, usually imposed by the funding provider, separately from those an NPO can use at its own discretion. These resources are identified as separate “funds”, and the associated income, expenses, assets and liabilities are tracked in the accounting records. This makes it easier to report to funding providers on how their funds have been used.
However, from an external reporting perspective, there is currently divergence in practice in how NPOs report on their activities. This is where the International Non-Profit Accounting Guidance (INPAG) comes in. INPAG aims to improve the quality, consistency and comparability of NPO financial reports by providing a uniform approach to reporting both restricted and unrestricted funds in an NPOs annual financial report in an integrated way. The proposals in Exposure Draft 3 are explained in this video.
Internally, fund accounting helps an NPO better understand the different resources it holds, and how they can be used to further its mission. By clearly identifying and segregating restricted and unrestricted resources, the NPO can make sure these resources are used efficiently towards the right objectives. It also helps identify funding gaps and shows what resources are available or need to be found. Additionally, it enables the calculation of the true cost of an NPO’s activities, by allocating essential overhead costs to the activities that require administrative support.
Segregating funds also helps with budgeting, as well as providing a sounder base for forecasts and projections. It can also allow an NPO to set aside unrestricted funds to achieve specific longer-term goals such as an IT upgrade or capital improvements and track the progress.
Moreover, it also assists auditors of grant funding by enabling them to easily review restricted income and how it has been spent. This makes it easier to connect grant reports with the NPO’s audited financial statements as a whole.
The more detailed accounting records then enable NPOs to report externally on their use of funds to funding providers, other key stakeholders, and the public. This transparency shows the extent to which an NPO’s funds are restricted or not and how they are being used. It also highlights any shortfalls or excesses on a fund and how the funds combine to provide the entire story of an NPO’s activities for the year. Furthermore, visibility over unrestricted cash and accumulated funds helps readers to assess an NPO’s financial sustainability.
Greater transparency boosts the confidence of funding providers in the NPO’s management, potentially encouraging more flexible or unrestricted funding.
Other users also gain a holistic view of an NPO’s overall financial performance and position, while still being able to see how a specific fund fits in. This comprehensive information enables informed decision-making and could increase donations as the NPO tells its story more effectively.
Implementing fund accounting does require time and effort, but there are several software systems available with fund accounting functionality, at a range of price points. You might be asking “Can we afford that?”. But the real question is, can you afford not to? Especially in this time where resources are limited, and more accountability is expected for the donation dollar.
If applied more broadly to all an NPO’s activities, rather than just for individual funding providers, fund accounting can provide even more value. It increases accountability for resource use and promotes good governance over all the NPO’s resources. The resulting detailed information allows an NPO to communicate its full financial story to all stakeholders in a clear, consistent, and comprehensive way.
Zowie Pateman FCA
Deputy Leader – Reporting and Assurance, Chartered Accountants Australia and New Zealand
IFR4NPO New Zealand Country Champion
For more information about INPAG proposals on fund accounting, visit Fund accounting by Non-profit organisations (ifr4npo.org)
