The Public Benefits Organizations Act, 2013 that has come into force as of 14 May 2024 pursuant to Legal Notice No. 78 of 2024 has not mentioned a specific financial reporting framework to be adopted by Public Benefits Organizations (PBOs). PBOs therefore need to reflect upon adopting a suitable reporting framework to ensure transparency, accountability and regulatory compliance. This guide provides an overview of the available financial reporting frameworks alongside factors to consider when choosing a framework.
The International Financial Reporting Standards (IFRS) Accounting Standards is primarily used by entities to ensure global comparability and transparency of financial statements. IFRS is adopted under several circumstances: publicly traded companies in many countries are required or permitted to prepare their financial statements in accordance with IFRS to maintain consistency and comparability for investors and other stakeholders. Multinational corporations may adopt IFRS to streamline reporting processes, reduce complexity, and enhance comparability across different jurisdictions. Additionally, some countries mandate the use of IFRS for specific types of entities, such as financial institutions or large corporations, to improve the quality and transparency of financial reporting. Entities may also voluntarily adopt IFRS to attract international investors, improve financial reporting quality, and align with global best practices. Moreover, companies involved in cross-border transactions or seeking listings on international stock exchanges may adopt IFRS to meet the regulatory requirements of multiple environments.
When selecting a financial reporting framework, several key factors should be considered to ensure it meets the organization's specific needs.
A financial reporting framework for not-for-profit entities is currently being developed. The framework has been coined ‘IFR4NPO’. IFR4NPO (International Financial Reporting for Non-Profit Organizations) or the International Non-Profit Accounting Guidance (INPAG) is an initiative focused on developing globally applicable financial reporting standards specifically for nonprofit organizations. This framework addresses the unique financial reporting needs of nonprofits, which often differ from those of private, profit-making entities. Led by Humentum and the Chartered Institute of Public Finance and Accountancy (CIPFA), IFR4NPO offers several advantages. It promotes global consistency by providing a unified set of accounting standards, hence enhancing comparability across different jurisdictions. Additionally, it improves transparency in financial reporting, which can increase trust among stakeholders such as donors, beneficiaries, and regulatory bodies. The framework is tailored specifically to nonprofit organisations (NPOs), considering their unique objectives, funding mechanisms and accountability requirements. This standardization enhances accountability, helping nonprofit organisations (NPOs) demonstrate their financial stewardship more effectively, potentially leading to increased funding and support. Moreover, the ease of reporting under IFR4NPO simplifies the process for non profit organizations operating across multiple countries, reducing the complexity of complying with various national standards.
However, there are bottlenecks. The implementation of IFR4NPO may incur significant costs, including training, system upgrades, and changes to financial reporting processes, which can be burdensome for small nonprofit organisations (NPOs). The new standard, while aiming to be accessible, might introduce complexity, particularly for small and less sophisticated organizations. Transitioning from existing national or regional standards to IFR4NPO could present challenges, such as reworking past financial records and re-educating stakeholders. Additionally, as a new initiative, IFR4NPO may face slow initial adoption, leading to a period of inconsistency across organizations. Lastly, while IFR4NPO aims to be globally applicable, it may not fully accommodate the specific legal and regulatory requirements of all countries, potentially necessitating supplementary local reporting or adaptations.
The Public Benefits Organisations Regulatory Authority (PBORA) should engage with other stakeholders in the nonprofit organisations (NPOs) sector to prescribe and enforce a uniform financial reporting framework for nonprofit organisations (NPOs) operating in Kenya.
A PBO is defined under article 5 (1) of the PBO Act as a voluntary membership or non-membership grouping of individuals or organizations, which is autonomous, nonpartisan non profit-making and which is organized and operated locally, nationally or internationally to engage in activities that benefit the public under areas set out in the sixth schedule of the Act and is registered as such by the Authority.
Before we deep-dive into financial reporting frameworks, let’s examine the fundamental difference between accounting basis and financial reporting framework, since one is often mistaken for the other.
The terms financial reporting framework and accounting basis are related but refer to different aspects of preparing and presenting financial information. A financial reporting framework is a set of principles, standards and guidelines that organizations follow when preparing their financial statements. It includes rules and conventions for measurement, recognition, presentation and disclosure of significant elements included in financial statements. Common frameworks include the IFRS for SMEs, International Financial Reporting Standards (IFRS) accounting standards, International Public Sector Accounting Standards (IPSAS), Local GAAP, etc. A financial reporting framework ensures consistency, comparability, and transparency in financial statements, helping stakeholders make informed decisions. On the other hand, an accounting basis refers to the method used to recognize and report different types of transactions e.g revenues, expenses etc in financial statements and determines the timing of when transactions are recorded. The primary accounting bases are the accrual basis, which records revenues and expenses when they are earned or incurred, and the cash basis, which records them only when cash is received or paid. A modification of either basis is also possible. The choice of accounting basis affects the timing and presentation of financial transactions. While the financial reporting framework outlines what should be included in financial statements and how it should be presented, the accounting basis determines the timing and method of recording transactions within those statements. In summary, the financial reporting framework provides the overall structure for financial reporting, while the accounting basis specifies how and when financial transactions are recorded.
Most non profit organizations in Kenya apply their own accounting policies (i.e special purpose framework) in preparation and presentation of financial statements in order to align with their donor reporting requirements. As a result, there is no harmonization and comparability of the financial information reported to the regulatory authorities and other stakeholders. The regulating authority has also never prescribed a framework for non-profit organizations.
Below we provide an overview of the three commonly used international financial reporting frameworks.
The International Public Sector Accounting Standards (IPSAS) reporting framework is primarily utilized by public sector entities, including governments and government agencies, to enhance the quality and comparability of financial reporting. It is specifically designed for public sector entities responsible for delivery of services to benefit the public and which finance their activities either by means of taxes or transfers from other levels of government, social contributions, debt or fees. It is applicable to national, regional and local governments, as well as their components whose aim is not to make profit. Additionally, many international organizations adopt IPSAS to standardize their financial reporting practices, thereby improving transparency and accountability. Countries with transitional economies may also adopt IPSAS to align with international best practices, attract foreign aid, and encourage investments. Furthermore, entities focused on improving public interest accountability and fiscal transparency may adopt IPSAS to provide more comprehensive and comparable financial information.
The International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs) reporting framework is designed to cater to the needs of small and medium-sized entities that have no public accountability obligations and produce general-purpose financial statements for external users. It is adopted in various circumstances: primarily, it is intended for entities that are not publicly accountable, such as those not listed on a public stock exchange and not holding assets in a fiduciary capacity for a broad group of outsiders. IFRS for SMEs provides a simplified financial reporting standard, making it suitable for entities with smaller size and less complex operations, thus reducing the compliance burden compared to full IFRS standards. In some jurisdictions, IFRS for SMEs is the mandated framework for financial reporting by small and medium-sized enterprises, offering a standardized yet simpler reporting approach. Additionally, small and medium-sized entities may adopt IFRS for SMEs to achieve a balance between the benefits of transparent and comparable financial reporting and the costs associated with applying full IFRS standards. Furthermore, entities operating in multiple jurisdictions or seeking cross-border investment and trade may use IFRS for SMEs to ensure consistency and comparability with international financial reporting practices.
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