REPORTING FOR NOT-FOR-PROFIT ENTITIES

Definition

A not-for-profit entity is one that does not carry on its activities for the purposes of profit and does not distribute its profits or assets to its owners or members. The main types of not-for-profit entity are clubs and societies, charities and public sector organisations.

Objective

The main objective of public sector organisations is to provide services to the general public. Their long-term aim is to break even, rather than to generate a surplus.

Most public sector organisations aim to provide value for money, which is usually analysed into the three Es - economy, efficiency and effectiveness.

The objective of other not-for-profit entities such as charities, clubs and societies is to carry out the activities for which they were created.

Assessing performance

It can be difficult to monitor and evaluate the success of a not-for-profit entity as the focus is not on a resultant profit as with a traditional business entity.

The success of the organisation should be measured against the key indicators that reflect the visions and values of the organisation. The strategic plan will identify the goals and the strategies that the organisation needs to adopt to achieve these goals.

The focus should be the measures of output, outcomes and their impact on what the organisation is trying to achieve.

Financial reporting

The financial statements of a public sector entity and charity are set out differently from those of a profit making entity because their purpose is different. A public sector organisation is not reporting a profit; it is reporting on its income and how it has spent that income in achieving its aims.

The financial statements would include a statement of financial position but the statement of comprehensive income is usually replaced with a statement of financial activities (or an income and expenditure account) showing incoming resources and resources expanded.

There is no specific standard covering the accounting and reporting for non-profit making entities under International Financial Reporting Standards. However, there is guidance in the UK such as:

• The Statement of Recommended Practice: Accounting and Reporting by Charities (SORP 2005); and
• Exposure Draft Statement of Principles for Financial Reporting: Proposed Interpretation for Public Benefit Entities.