The Malegam Committee on reforming the micro-finance sector suggested, inter-alia, creation of a new regulator exclusively for these institutions and emphasis on corporate governance policies. Close on the heels of this, the Institute of Chartered Accountants of India (ICAI) has recommended, in a report to the Ministry of Corporate Affairs, that non-profit organisations (NPs) come under a single regulator since the present options under the Societies Registration Act and Indian Trusts Act leave a wide regulatory gap and encourage laundering of money. The ICAI has suggested that NP organisations follow the accounting standards formulated by them with a few exemptions for those with revenue below Rs 50 crore. NPs with revenue in excess of this would have to follow all accounting standards and use the accrual system of accounting.

NPs in India are a mixed bag — there are those doing a lot of work in uplifting weaker sections of society and for other social causes, those that conduct some social work because they have to and those that act as a front for other activities. At present, there is no comprehensive accounting standard for non-profits in India; they typically follow a cash system of accounting.

Indonesian effort

The Indonesian Institute of Accountants has attempted to write accounting standards using IFRS as a benchmark and issued Statement of Financial Accounting Standard 45 on Financial Reporting for non-profit organisations way back in 2000. The Standard recognises two types of donations that NPs could get — restricted donations where the use of the funds is limited by the contributors for a specific cause as against an unrestricted donation which is a free-for-all. Many IFRS requirements have found their way into the standard — sequencing assets according to their liquidity and liabilities according to their maturity; classifying assets as current and non-current and disclosures in the Notes on Accounts. The operative portion of the financial statements is termed Statement of Activities. A Statement of financial position provided by a non-profit organisation should report the amounts of net assets based on the existence or absence of donor-imposed restrictions, i.e. permanently restricted, temporarily restricted, and unrestricted. Requirements of the cash flow statements are as detailed as that for a corporate entity.

Though there is no specific mention of the accrual system of accounting in the Standard, it could be found in the Framework to the presentation of financial statements.

In other jurisdictions, there are specific requirements that NPs should publish their Annual Report on their Web site once in a year. US GAAP has two significant pronouncements for NPs- SFAS 116 and 117 that prescribe accounting for contributions received and contributions made and financial statements respectively. The Standards require non-profit organisations to distinguish between contributions received i.e. permanently restricted net assets, temporarily restricted net assets, and unrestricted net assets.

Indian standard

Though the brand ‘developing country' may no longer suit India, the disparity in incomes is wide enough for donors abroad to contribute for social causes. They would expect that the accounting procedures followed are measurable with global standards. Diversion of funds amongst projects, cost over-runs, multiple funding for the same project are some of the key areas donors would like to be aware of . If the definition of a small and medium enterprise (SME) as given by the IASB had been followed in India, most NPs would qualify. Since we have decided to maintain silence over IFRS for SMEs, the ICAI should issue an accounting standard for NPs.

(The author is a Bangalore-based chartered accountant).

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