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FRC’s Response to IFR4NPO’s International Non-Profit Accounting Guidance – Exposure Draft 3 (ED3)
Karen Sanderson IFR4NPO Project Lead Chartered Institute of Public Finance and Accountancy 77 Mansell Street London E1 8AN
11 September 2024
International Non-Profit Accounting Guidance Exposure Draft 3 (‘INPAG ED3' or 'Guidance'): Invitation to comment
Dear Karen,
I am writing on behalf of the UK's Financial Reporting Council (FRC) in response to the above consultation.
We welcome the opportunity to contribute to your Guidance development process, both through our responses to consultations and our participation in the project's Technical Advisory Group. We are grateful to the project team for taking this project forward, and note that INPAG has the potential to contribute towards addressing the gaps that exist in international financial reporting frameworks in relation to non-profit organisations (NPOs). However, we do have significant concerns about the scale and complexity of the project which we believe poses a risk to achieving the main objective of supporting high-quality financial reporting.
Please note that we have not responded to every question in the invitation to comment. However, we have chosen to focus on what we consider the more pertinent matters, and where we consider our input to be most valuable to the INPAG project. Our detailed comments in response to INPAG ED3 are included in the Appendix to this letter. However, we would like to highlight some key themes here.
1. Overall quality and consistency of drafting and scale of INPAG project
During our review of ED3 and the previous EDs, we have noted a lack of consistency in various places in the proposed drafting. For instance, we noted inconsistencies between related paragraphs, between the Guidance and the Application Guidance, and between the Guidance and the Basis for Conclusions. We have also noted instances when the rationale is included in the Guidance, rather than the Basis for Conclusions. We recommend that INPAG reconsiders the way the rationale for its Guidance is expressed, and specifically reconsiders the balance between the Guidance itself and the Basis for Conclusions.
As previously mentioned in response to ED1, we suggest that INPAG should consider not having the guidance spread between Guidance and Application Guidance. Whilst we appreciate the challenges in drafting such documents, inconsistencies lead to a risk that stakeholders will struggle to understand the final Guidance and engage with it in a manner that will result in good quality reporting.
Whilst we fully commend the spirit of the INPAG project, we continue to have concerns with its scale in terms of the layers of complexity, optionality, and sheer volume of content. The amount of content that stakeholders will need to engage with, means there is a substantial risk that the overall project objective of producing high-quality financial reporting will not be achieved.
2. Smaller NPOs and scope of INPAG
Based on the various INPAG outreach activities, we understand that INPAG is not intended to be suitable for smaller NPOs to apply.
If INPAG is not intended to be suitable for smaller NPOs, then we suggest it may be worth considering clearly defining a smaller NPO in the final Guidance. It is fundamental that standard-setters make it clear to which entities a set of standards is intended to apply, so that there is clarity:
- when developing and finalising standards or guidance and considering what level of disclosure may be appropriate;
- for jurisdictions in future decision-making about whether to adopt INPAG; and
- for preparers if considering voluntary adoption of INPAG.
It will also be particularly important for individual jurisdictions to be able to understand how the scope of INPAG relates to any jurisdictional requirements to prepare accruals accounts, as drafted, the guidance implies that smaller entities are those for which cash accounting is sufficient to meet users' information needs.
3. Section 37 Supplementary Information
Whilst the focus of our response is on the general-purpose financial statements (GPFS), we consider that including supplementary information as an appendix to the GPFS may cause clutter for users of the financial statements. This is likely to cause confusion for users when some of the supplementary information is not subject to audit. As such we strongly recommend that either Section 37 Supplementary information and its related Practice Guide are published separately from INPAG, or that Section 37 is relocated to sit outside the main framework.
4. INPAG Implementation Guidance Annex A: Illustrative financial statements
Whilst there is merit in illustrative financial statements being available to aid preparers who may struggle with the requirements without any examples, there is an increased risk of boilerplate reporting which results in poorer quality financial reporting. We are not convinced that illustrative financial statements should be issued by standard setters, as this may have unintended consequences in terms of how preparers may interpret such supporting material, considering it a requirement, as opposed to following the accounting standards for their specific facts and circumstances. There are also challenges in providing illustrative financial statements to cover an international audience given that, in practice, entities may need to integrate the requirements of INPAG with jurisdictional requirements.
5. Areas of technical disagreement
Our response draws on the FRC's experience in developing accounting standards applicable in the UK and Republic of Ireland. This includes FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, which addresses issues specific to entities that may be categorised as NPOs. The requirements in FRS 102 were originally based on the IFRS for SMEs Accounting Standard, modified both in terms of the scope of entities eligible to apply it and the accounting treatments provided. Our financial results show... [^1] The scope of FRS 102 includes Public Benefit Entities (PBEs) and therefore includes the most significant and relevant PBE-specific issues. As set out in the Appendix, we have some significant reservations about certain aspects of the proposals in relation to fund accounting, designated funds, classification and presentation of expenditure and accounting for support costs. Specifically:
INPAG Section 36 Fund accounting
Overall, we support the proposal in ED3 not to require the separate presentation of funds with restrictions and funds without restrictions on the face of the Statement of Income and Expenses (SOIE). However, we have some reservations on some of the proposals in Section 36 as we consider the current proposal to contradict the underlying principles of fund accounting. These have been noted below.
Internally designated funds
We agree with the INPAG proposals that internally designated funds should not be reported as funds with restrictions. However, the proposed drafting is ambiguous and inconsistent on whether INPAG considers that an internally designated fund should be disclosed separately from general funds. We note that internally designated funds may exist in an NPO, but these reflect no more than management intention. Such funds do not create a separate class of residual interest/net assets in the entity. In our view, any disclosure of internally-designated funds would be better located in the narrative reporting where it can be linked to the NPO's strategy and how that will be delivered. We suggest that the wording is reviewed to ensure it is consistent and in accordance with the principles of fund accounting.
Tracking income, expenses, assets and liabilities for each fund
We agree that, when a separate fund exists, it is necessary to track the income, expenses, assets and liabilities relating to that fund, otherwise it would not be possible to keep an accurate record of the fund's balance. However, the need to maintain records should not need to be specified in INPAG. This concept applies to all transactions, events or conditions that are reflected in the financial statements. However, if the existence of separate records is intended to be an indicator of whether a fund exists, the current INPAG drafting does not achieve this. Ultimately, the question of whether an NPO needs to track its transactions and maintain records is separate from the question of what it needs to present and disclose in its financial statements (which is usually at a more aggregated level). ED3 is not clear on how an NPO shall identify a separate fund for financial reporting purposes, as opposed to management control and reporting purposes. We suggest Section 36 is reviewed so that there is no ambiguity on this matter.
Support costs and fund accounting
We do not agree with the proposed approach which requires that support costs should be charged to a fund, even if inclusion of such costs is not permitted under the terms of any arrangement. Such an approach would be contrary to the definition of a fund with restrictions because it would imply that the funds are being depleted by support costs for which those funds are not allowed to be used. However, we acknowledge that for management reporting purposes, an NPO may wish to monitor the full cost of delivering the relevant activity and therefore may include all support costs. We suggest that the proposals are revisited so that the requirements cover only what is required for financial reporting purposes and should reinforce that reporting by activity (by function) should include support costs.
INPAG Section 24 Part II Classification of expenditure
We do not agree that there should be a rebuttable presumption in respect of classification of expenditure for disclosure purposes, nor that 'by nature' can be presumed to be the best form of presentation and disclosure of expenditure for an NPO.
We understand that the development of INPAG takes into account relevant IASB projects. At the time of publication of ED3 in May 2024, the IASB had recently issued IFRS 18 Presentation and Disclosure in Financial Statements, which we consider is relevant as it represents the latest developments by the IASB. It is not clear to what degree INPAG ED3 has taken into account the requirements of IFRS 18 in its final form. We think INPAG should take this into account when finalising its Guidance; at present INPAG appears to be diverging from the latest developments in this area.
The views expressed in our response to INPAG ED3 are separate from, and will not necessarily affect, the FRC's future development and maintenance of UK and Ireland financial reporting standards.
If you have any queries or would like to discuss our comments in more detail, please contact Stephen Maloney or Omadevi Jani at [email protected].
Yours sincerely
Mark Babington Executive Director, Regulatory Standards Direct telephone line: Email:
International Non-profit Accounting Guidance (INPAG) Exposure Draft 3 Response template
Response template
Please use this form to record your responses to the Specific Matters for Comment relating to INPAG Exposure Draft 3
Comments are most helpful if they:
- Address the question asked;
- Contain a clear explanation to support the response provided, whether this is agreeing or otherwise with any proposals made;
- Propose alternatives for consideration, where responses are not in agreement with the proposal made;
- Specify the INPAG paragraphs to which any comments relate; and
- Identify any wording in the proposals that might not be clear because of how they translate.
The text boxes will expand as required. There is no size limit. There are 11 question areas, according to the various sections in INPAG. You do not need to answer all questions and can choose to answer as many or as few as you wish. You may comment on any aspect of Exposure Draft, not just the specific matters identified. General comments should be added at the end of this document.
Responses must be received by 16 September 2024 and must be in English.
Responses can be submitted to [email protected] or through the website at www.ifr4npo.org/have-your-say
Respondent information:
| First name: | Mark | Country: (this should be the country in which you are based) | United Kingdom |
|---|---|---|---|
| Last name: | Babington | Professional interest: please choose from: | Accounting standard setter |
| Email: | • NPO, ie preparer of financial statements, | ||
| Position: | Executive Director, Regulatory Standards | • auditor, | |
| • accounting standard setter, | |||
| • professional accounting organisation, | |||
| Organisation: (who do you work for) | Financial Reporting Council | • regulator of NPOs, | |
| • donor, | |||
| • academic, | |||
| • civil society, | |||
| Response submitted: | • on behalf of my organisation | • user of NPO services, | |
| • other (please state) |
| Please indicate whether you wish to receive further information about this project and consent to being contacted at the email address provided. | Disagree |
|---|---|
This document has been designed purely to enable feedback to Exposure Draft 3. Participation is undertaken on an entirely voluntary basis. The responses will be used to shape the development of INPAG and not for any other purpose. We ask for your name and contact information to enable us to contact you if we should have any clarifications regarding your responses. Responses will be public, but personal contact information will not be disclosed. Personal information will only be held for the purposes of developing INPAG. You may withdraw your consent for us to hold any of your personal information at any time by contacting us at [email protected].
Specific Matters for Comment
Question 1: Fund accounting
INPAG Section 36 sets out the characteristics of a fund for the purposes of INPAG and whether a fund is presented in the financial statements as being with or without restrictions. A fund is presented as with restrictions where the use of resources is limited to a specific purpose or activity as a consequence of externally imposed legal or equivalent arrangements or where a fund is established for a fundraising campaign with an externally communicated commitment on the specific use for the funds. The guidance requires that the income, expenses, assets and liabilities associated with a fund are recorded. New disclosures are required for fund balances and movements in the year. INPAG Section 5 has been amended to remove the requirement to disclose funds with and without restrictions on the face of the Statement of Income and Expenses.
| 1 Fund accounting | References ## International Financial Reporting Council Letter
Subject: International Non-Profit Accounting Guidance Exposure Draft 3 (‘INPAG ED3' or 'Guidance'): Invitation to comment
Dear Karen,
I am writing on behalf of the UK's Financial Reporting Council (FRC) in response to the above consultation.
We welcome the opportunity to contribute to your Guidance development process, both through our responses to consultations and our participation in the project's Technical Advisory Group. We are grateful to the project team for taking this project forward, and note that INPAG has the potential to contribute towards addressing the gaps that exist in international financial reporting frameworks in relation to non-profit organisations (NPOs). However, we do have significant concerns about the scale and complexity of the project which we believe poses a risk to achieving the main objective of supporting high-quality financial reporting.
Please note that we have not responded to every question in the invitation to comment. However, we have chosen to focus on what we consider the more pertinent matters, and where we consider our input to be most valuable to the INPAG project. Our detailed comments in response to INPAG ED3 are included in the Appendix to this letter. However, we would like to highlight some key themes here.
1. Overall quality and consistency of drafting and scale of INPAG project
During our review of ED3 and the previous EDs, we have noted a lack of consistency in various places in the proposed drafting. For instance, we noted inconsistencies between related paragraphs, between the Guidance and the Application Guidance, and between the Guidance and the Basis for Conclusions. We have also noted instances when the rationale is included in the Guidance, rather than the Basis for Conclusions. We recommend that INPAG reconsiders the way the rationale for its Guidance is expressed, and specifically reconsiders the balance between the Guidance itself and the Basis for Conclusions.
As previously mentioned in response to ED1, we suggest that INPAG should consider not having the guidance spread between Guidance and Application Guidance. Whilst we appreciate the challenges in drafting such documents, inconsistencies lead to a risk that stakeholders will struggle to understand the final Guidance and engage with it in a manner that will result in good quality reporting.
Whilst we fully commend the spirit of the INPAG project, we continue to have concerns with its scale in terms of the layers of complexity, optionality, and sheer volume of content. The amount of content that stakeholders will need to engage with, means there is a substantial risk that the overall project objective of producing high-quality financial reporting will not be achieved.
2. Smaller NPOs and scope of INPAG
Based on the various INPAG outreach activities, we understand that INPAG is not intended to be suitable for smaller NPOs to apply.
If INPAG is not intended to be suitable for smaller NPOs, then we suggest it may be worth considering clearly defining a smaller NPO in the final Guidance. It is fundamental that standard-setters make it clear to which entities a set of standards is intended to apply, so that there is clarity:
- when developing and finalising standards or guidance and considering what level of disclosure may be appropriate;
- for jurisdictions in future decision-making about whether to adopt INPAG; and
- for preparers if considering voluntary adoption of INPAG.
It will also be particularly important for individual jurisdictions to be able to understand how the scope of INPAG relates to any jurisdictional requirements to prepare accruals accounts, as drafted, the guidance implies that smaller entities are those for which cash accounting is sufficient to meet users' information needs.
3. Section 37 Supplementary Information
Whilst the focus of our response is on the general-purpose financial statements (GPFS), we consider that including supplementary information as an appendix to the GPFS may cause clutter for users of the financial statements. This is likely to cause confusion for users when some of the supplementary information is not subject to audit. As such we strongly recommend that either Section 37 Supplementary information and its related Practice Guide are published separately from INPAG, or that Section 37 is relocated to sit outside the main framework.
4. INPAG Implementation Guidance Annex A: Illustrative financial statements
Whilst there is merit in illustrative financial statements being available to aid preparers who may struggle with the requirements without any examples, there is an increased risk of boilerplate reporting which results in poorer quality financial reporting. We are not convinced that illustrative financial statements should be issued by standard setters, as this may have unintended consequences in terms of how preparers may interpret such supporting material, considering it a requirement, as opposed to following the accounting standards for their specific facts and circumstances. There are also challenges in providing illustrative financial statements to cover an international audience given that, in practice, entities may need to integrate the requirements of INPAG with jurisdictional requirements.
5. Areas of technical disagreement
Our response draws on the FRC's experience in developing accounting standards applicable in the UK and Republic of Ireland. This includes FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, which addresses issues specific to entities that may be categorised as NPOs. The requirements in FRS 102 were originally based on the IFRS for SMEs Accounting Standard, modified both in terms of the scope of entities eligible to apply it and the accounting treatments provided.[^1] The scope of FRS 102 includes Public Benefit Entities (PBEs) and therefore includes the most significant and relevant PBE-specific issues. As set out in the Appendix, we have some significant reservations about certain aspects of the proposals in relation to fund accounting, designated funds, classification and presentation of expenditure and accounting for support costs. Specifically:
INPAG Section 36 Fund accounting
Overall, we support the proposal in ED3 not to require the separate presentation of funds with restrictions and funds without restrictions on the face of the Statement of Income and Expenses (SOIE). However, we have some reservations on some of the proposals in Section 36 as we consider the current proposal to contradict the underlying principles of fund accounting. These have been noted below.
Internally designated funds
We agree with the INPAG proposals that internally designated funds should not be reported as funds with restrictions. However, the proposed drafting is ambiguous and inconsistent on whether INPAG considers that an internally designated fund should be disclosed separately from general funds. We note that internally designated funds may exist in an NPO, but these reflect no more than management intention. Such funds do not create a separate class of residual interest/net assets in the entity. In our view, any disclosure of internally-designated funds would be better located in the narrative reporting where it can be linked to the NPO's strategy and how that will be delivered. We suggest that the wording is reviewed to ensure it is consistent and in accordance with the principles of fund accounting.
Tracking income, expenses, assets and liabilities for each fund
We agree that, when a separate fund exists, it is necessary to track the income, expenses, assets and liabilities relating to that fund, otherwise it would not be possible to keep an accurate record of the fund's balance. However, the need to maintain records should not need to be specified in INPAG. This concept applies to all transactions, events or conditions that are reflected in the financial statements. However, if the existence of separate records is intended to be an indicator of whether a fund exists, the current INPAG drafting does not achieve this. Ultimately, the question of whether an NPO needs to track its transactions and maintain records is separate from the question of what it needs to present and disclose in its financial statements (which is usually at a more aggregated level). ED3 is not clear on how an NPO shall identify a separate fund for financial reporting purposes, as opposed to management control and reporting purposes. We suggest Section 36 is reviewed so that there is no ambiguity on this matter.
Support costs and fund accounting
We do not agree with the proposed approach which requires that support costs should be charged to a fund, even if inclusion of such costs is not permitted under the terms of any arrangement. Such an approach would be contrary to the definition of a fund with restrictions because it would imply that the funds are being depleted by support costs for which those funds are not allowed to be used. However, we acknowledge that for management reporting purposes, an NPO may wish to monitor the full cost of delivering the relevant activity and therefore may include all support costs. We suggest that the proposals are revisited so that the requirements cover only what is required for financial reporting purposes and should reinforce that reporting by activity (by function) should include support costs.
INPAG Section 24 Part II Classification of expenditure
We do not agree that there should be a rebuttable presumption in respect of classification of expenditure for disclosure purposes, nor that 'by nature' can be presumed to be the best form of presentation and disclosure of expenditure for an NPO.
We understand that the development of INPAG takes into account relevant IASB projects. At the time of publication of ED3 in May 2024, the IASB had recently issued IFRS 18 Presentation and Disclosure in Financial Statements, which we consider is relevant as it represents the latest developments by the IASB. It is not clear to what degree INPAG ED3 has taken into account the requirements of IFRS 18 in its final form. We think INPAG should take this into account when finalising its Guidance; at present INPAG appears to be diverging from the latest developments in this area.
The views expressed in our response to INPAG ED3 are separate from, and will not necessarily affect, the FRC's future development and maintenance of UK and Ireland financial reporting standards.
If you have any queries or would like to discuss our comments in more detail, please contact Stephen Maloney or Omadevi Jani at [email protected].
Yours sincerely
Mark Babington Executive Director, Regulatory Standards Direct telephone line: Email:
International Non-profit Accounting Guidance (INPAG) Exposure Draft 3 Response template
Response template
Please use this form to record your responses to the Specific Matters for Comment relating to INPAG Exposure Draft 3
Comments are most helpful if they:
- Address the question asked;
- Contain a clear explanation to support the response provided, whether this is agreeing or otherwise with any proposals made;
- Propose alternatives for consideration, where responses are not in agreement with the proposal made;
- Specify the INPAG paragraphs to which any comments relate; and
- Identify any wording in the proposals that might not be clear because of how they translate.
The text boxes will expand as required. There is no size limit. There are 11 question areas, according to the various sections in INPAG. You do not need to answer all questions and can choose to answer as many or as few as you wish. You may comment on any aspect of Exposure Draft, not just the specific matters identified. General comments should be added at the end of this document.
Responses must be received by 16 September 2024 and must be in English.
Responses can be submitted to [email protected] or through the website at www.ifr4npo.org/have-your-say
Respondent information:
| First name: | Mark | Country: (this should be the country in which you are based) | United Kingdom |
|---|---|---|---|
| Last name: | Babington | Professional interest: please choose from: | Accounting standard setter |
| Email: | • NPO, ie preparer of financial statements, | ||
| Position: | Executive Director, Regulatory Standards | • auditor, | |
| • accounting standard setter, | |||
| • professional accounting organisation, | |||
| Organisation: (who do you work for) | Financial Reporting Council | • regulator of NPOs, | |
| • donor, | |||
| • academic, | |||
| • civil society, | |||
| Response submitted: | • on behalf of my organisation | • user of NPO services, | |
| • other (please state) |
| Please indicate whether you wish to receive further information about this project and consent to being contacted at the email address provided. | Disagree |
|---|---|
This document has been designed purely to enable feedback to Exposure Draft 3. Participation is undertaken on an entirely voluntary basis. The responses will be used to shape the development of INPAG and not for any other purpose. We ask for your name and contact information to enable us to contact you if we should have any clarifications regarding your responses. Responses will be public, but personal contact information will not be disclosed. Personal information will only be held for the purposes of developing INPAG. You may withdraw your consent for us to hold any of your personal information at any time by contacting us at [email protected].
Specific Matters for Comment
Question 1: Fund accounting
INPAG Section 36 sets out the characteristics of a fund for the purposes of INPAG and whether a fund is presented in the financial statements as being with or without restrictions. A fund is presented as with restrictions where the use of resources is limited to a specific purpose or activity as a consequence of externally imposed legal or equivalent arrangements or where a fund is established for a fundraising campaign with an externally communicated commitment on the specific use for the funds. The guidance requires that the income, expenses, assets and liabilities associated with a fund are recorded. New disclosures are required for fund balances and movements in the year. INPAG Section 5 has been amended to remove the requirement to disclose funds with and without restrictions on the face of the Statement of Income and Expenses.
| 1 Fund accounting | References | Response ## International Non-profit Accounting Guidance (INPAG) Exposure Draft 3 Response
Karen Sanderson IFR4NPO Project Lead Chartered Institute of Public Finance and Accountancy 77 Mansell Street London E1 8AN
11 September 2024
Subject: International Non-Profit Accounting Guidance Exposure Draft 3 (‘INPAG ED3' or 'Guidance'): Invitation to comment
Dear Karen,
I am writing on behalf of the UK's Financial Reporting Council (FRC) in response to the above consultation.
We welcome the opportunity to contribute to your Guidance development process, both through our responses to consultations and our participation in the project's Technical Advisory Group. We are grateful to the project team for taking this project forward, and note that INPAG has the potential to contribute towards addressing the gaps that exist in international financial reporting frameworks in relation to non-profit organisations (NPOs). However, we do have significant concerns about the scale and complexity of the project which we believe poses a risk to achieving the main objective of supporting high-quality financial reporting.
Please note that we have not responded to every question in the invitation to comment. However, we have chosen to focus on what we consider the more pertinent matters, and where we consider our input to be most valuable to the INPAG project. Our detailed comments in response to INPAG ED3 are included in the Appendix to this letter. However, we would like to highlight some key themes here.
1. Overall quality and consistency of drafting and scale of INPAG project
During our review of ED3 and the previous EDs, we have noted a lack of consistency in various places in the proposed drafting. For instance, we noted inconsistencies between related paragraphs, between the Guidance and the Application Guidance, and between the Guidance and the Basis for Conclusions. We have also noted instances when the rationale is included in the Guidance, rather than the Basis for Conclusions. We recommend that INPAG reconsiders the way the rationale for its Guidance is expressed, and specifically reconsiders the balance between the Guidance itself and the Basis for Conclusions.
As previously mentioned in response to ED1, we suggest that INPAG should consider not having the guidance spread between Guidance and Application Guidance. Whilst we appreciate the challenges in drafting such documents, inconsistencies lead to a risk that stakeholders will struggle to understand the final Guidance and engage with it in a manner that will result in good quality reporting.
Whilst we fully commend the spirit of the INPAG project, we continue to have concerns with its scale in terms of the layers of complexity, optionality, and sheer volume of content. The amount of content that stakeholders will need to engage with, means there is a substantial risk that the overall project objective of producing high-quality financial reporting will not be achieved.
2. Smaller NPOs and scope of INPAG
Based on the various INPAG outreach activities, we understand that INPAG is not intended to be suitable for smaller NPOs to apply.
If INPAG is not intended to be suitable for smaller NPOs, then we suggest it may be worth considering clearly defining a smaller NPO in the final Guidance. It is fundamental that standard-setters make it clear to which entities a set of standards is intended to apply, so that there is clarity:
- when developing and finalising standards or guidance and considering what level of disclosure may be appropriate;
- for jurisdictions in future decision-making about whether to adopt INPAG; and
- for preparers if considering voluntary adoption of INPAG.
It will also be particularly important for individual jurisdictions to be able to understand how the scope of INPAG relates to any jurisdictional requirements to prepare accruals accounts, as drafted, the guidance implies that smaller entities are those for which cash accounting is sufficient to meet users' information needs.
3. Section 37 Supplementary Information
Whilst the focus of our response is on the general-purpose financial statements (GPFS), we consider that including supplementary information as an appendix to the GPFS may cause clutter for users of the financial statements. This is likely to cause confusion for users when some of the supplementary information is not subject to audit. As such we strongly recommend that either Section 37 Supplementary information and its related Practice Guide are published separately from INPAG, or that Section 37 is relocated to sit outside the main framework.
4. INPAG Implementation Guidance Annex A: Illustrative financial statements
Whilst there is merit in illustrative financial statements being available to aid preparers who may struggle with the requirements without any examples, there is an increased risk of boilerplate reporting which results in poorer quality financial reporting. We are not convinced that illustrative financial statements should be issued by standard setters, as this may have unintended consequences in terms of how preparers may interpret such supporting material, considering it a requirement, as opposed to following the accounting standards for their specific facts and circumstances. There are also challenges in providing illustrative financial statements to cover an international audience given that, in practice, entities may need to integrate the requirements of INPAG with jurisdictional requirements.
5. Areas of technical disagreement
Our response draws on the FRC's experience in developing accounting standards applicable in the UK and Republic of Ireland. This includes FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, which addresses issues specific to entities that may be categorised as NPOs. The requirements in FRS 102 were originally based on the IFRS for SMEs Accounting Standard, modified both in terms of the scope of entities eligible to apply it and the accounting treatments provided.[^1] The scope of FRS 102 includes Public Benefit Entities (PBEs) and therefore includes the most significant and relevant PBE-specific issues. As set out in the Appendix, we have some significant reservations about certain aspects of the proposals in relation to fund accounting, designated funds, classification and presentation of expenditure and accounting for support costs. Specifically:
INPAG Section 36 Fund accounting
Overall, we support the proposal in ED3 not to require the separate presentation of funds with restrictions and funds without restrictions on the face of the Statement of Income and Expenses (SOIE). However, we have some reservations on some of the proposals in Section 36 as we consider the current proposal to contradict the underlying principles of fund accounting. These have been noted below.
Internally designated funds
We agree with the INPAG proposals that internally designated funds should not be reported as funds with restrictions. However, the proposed drafting is ambiguous and inconsistent on whether INPAG considers that an internally designated fund should be disclosed separately from general funds. We note that internally designated funds may exist in an NPO, but these reflect no more than management intention. Such funds do not create a separate class of residual interest/net assets in the entity. In our view, any disclosure of internally-designated funds would be better located in the narrative reporting where it can be linked to the NPO's strategy and how that will be delivered. We suggest that the wording is reviewed to ensure it is consistent and in accordance with the principles of fund accounting.
Tracking income, expenses, assets and liabilities for each fund
We agree that, when a separate fund exists, it is necessary to track the income, expenses, assets and liabilities relating to that fund, otherwise it would not be possible to keep an accurate record of the fund's balance. However, the need to maintain records should not need to be specified in INPAG. This concept applies to all transactions, events or conditions that are reflected in the financial statements. However, if the existence of separate records is intended to be an indicator of whether a fund exists, the current INPAG drafting does not achieve this. Ultimately, the question of whether an NPO needs to track its transactions and maintain records is separate from the question of what it needs to present and disclose in its financial statements (which is usually at a more aggregated level). ED3 is not clear on how an NPO shall identify a separate fund for financial reporting purposes, as opposed to management control and reporting purposes. We suggest Section 36 is reviewed so that there is no ambiguity on this matter.
Support costs and fund accounting
We do not agree with the proposed approach which requires that support costs should be charged to a fund, even if inclusion of such costs is not permitted under the terms of any arrangement. Such an approach would be contrary to the definition of a fund with restrictions because it would imply that the funds are being depleted by support costs for which those funds are not allowed to be used. However, we acknowledge that for management reporting purposes, an NPO may wish to monitor the full cost of delivering the relevant activity and therefore may include all support costs. We suggest that the proposals are revisited so that the requirements cover only what is required for financial reporting purposes and should reinforce that reporting by activity (by function) should include support costs.
INPAG Section 24 Part II Classification of expenditure
We do not agree that there should be a rebuttable presumption in respect of classification of expenditure for disclosure purposes, nor that 'by nature' can be presumed to be the best form of presentation and disclosure of expenditure for an NPO.
We understand that the development of INPAG takes into account relevant IASB projects. At the time of publication of ED3 in May 2024, the IASB had recently issued IFRS 18 Presentation and Disclosure in Financial Statements, which we consider is relevant as it represents the latest developments by the IASB. It is not clear to what degree INPAG ED3 has taken into account the requirements of IFRS 18 in its final form. We think INPAG should take this into account when finalising its Guidance; at present INPAG appears to be diverging from the latest developments in this area.
The views expressed in our response to INPAG ED3 are separate from, and will not necessarily affect, the FRC's future development and maintenance of UK and Ireland financial reporting standards.
If you have any queries or would like to discuss our comments in more detail, please contact Stephen Maloney or Omadevi Jani at [email protected].
Yours sincerely
Mark Babington Executive Director, Regulatory Standards Direct telephone line: Email:
International Non-profit Accounting Guidance (INPAG) Exposure Draft 3 Response template
Response template
Please use this form to record your responses to the Specific Matters for Comment relating to INPAG Exposure Draft 3
Comments are most helpful if they:
- Address the question asked;
- Contain a clear explanation to support the response provided, whether this is agreeing or otherwise with any proposals made;
- Propose alternatives for consideration, where responses are not in agreement with the proposal made;
- Specify the INPAG paragraphs to which any comments relate; and
- Identify any wording in the proposals that might not be clear because of how they translate.
The text boxes will expand as required. There is no size limit. There are 11 question areas, according to the various sections in INPAG. You do not need to answer all questions and can choose to answer as many or as few as you wish. You may comment on any aspect of Exposure Draft, not just the specific matters identified. General comments should be added at the end of this document.
Responses must be received by 16 September 2024 and must be in English.
Responses can be submitted to [email protected] or through the website at www.ifr4npo.org/have-your-say
Respondent information:
| First name: | Mark | Country: (this should be the country in which you are based) | United Kingdom |
|---|---|---|---|
| Last name: | Babington | Professional interest: please choose from: | Accounting standard setter |
| Email: | • NPO, ie preparer of financial statements, | ||
| Position: | Executive Director, Regulatory Standards | • auditor, | |
| • accounting standard setter, | |||
| • professional accounting organisation, | |||
| Organisation: (who do you work for) | Financial Reporting Council | • regulator of NPOs, | |
| • donor, | |||
| • academic, | |||
| • civil society, | |||
| Response submitted: | • on behalf of my organisation | • user of NPO services, | |
| • other (please state) |
| Please indicate whether you wish to receive further information about this project and consent to being contacted at the email address provided. | Disagree |
|---|---|
This document has been designed purely to enable feedback to Exposure Draft 3. Participation is undertaken on an entirely voluntary basis. The responses will be used to shape the development of INPAG and not for any other purpose. We ask for your name and contact information to enable us to contact you if we should have any clarifications regarding your responses. Responses will be public, but personal contact information will not be disclosed. Personal information will only be held for the purposes of developing INPAG. You may withdraw your consent for us to hold any of your personal information at any time by contacting us at [email protected].
Specific Matters for Comment
Question 1: Fund accounting
INPAG Section 36 sets out the characteristics of a fund for the purposes of INPAG and whether a fund is presented in the financial statements as being with or without restrictions. A fund is presented as with restrictions where the use of resources is limited to a specific purpose or activity as a consequence of externally imposed legal or equivalent arrangements or where a fund is established for a fundraising campaign with an externally communicated commitment on the specific use for the funds. The guidance requires that the income, expenses, assets and liabilities associated with a fund are recorded. New disclosures are required for fund balances and movements in the year. INPAG Section 5 has been amended to remove the requirement to disclose funds with and without restrictions on the face of the Statement of Income and Expenses.
| 1 Fund accounting | References | Response ## International Financial Reporting Council Letter
Subject: International Non-Profit Accounting Guidance Exposure Draft 3 (‘INPAG ED3' or 'Guidance'): Invitation to comment
Dear Karen,
I am writing on behalf of the UK's Financial Reporting Council (FRC) in response to the above consultation.
We welcome the opportunity to contribute to your Guidance development process, both through our responses to consultations and our participation in the project's Technical Advisory Group. We are grateful to the project team for taking this project forward, and note that INPAG has the potential to contribute towards addressing the gaps that exist in international financial reporting frameworks in relation to non-profit organisations (NPOs). However, we do have significant concerns about the scale and complexity of the project which we believe poses a risk to achieving the main objective of supporting high-quality financial reporting.
Please note that we have not responded to every question in the invitation to comment. However, we have chosen to focus on what we consider the more pertinent matters, and where we consider our input to be most valuable to the INPAG project. Our detailed comments in response to INPAG ED3 are included in the Appendix to this letter. However, we would like to highlight some key themes here.
1. Overall quality and consistency of drafting and scale of INPAG project
During our review of ED3 and the previous EDs, we have noted a lack of consistency in various places in the proposed drafting. For instance, we noted inconsistencies between related paragraphs, between the Guidance and the Application Guidance, and between the Guidance and the Basis for Conclusions. We have also noted instances when the rationale is included in the Guidance, rather than the Basis for Conclusions. We recommend that INPAG reconsiders the way the rationale for its Guidance is expressed, and specifically reconsiders the balance between the Guidance itself and the Basis for Conclusions.
As previously mentioned in response to ED1, we suggest that INPAG should consider not having the guidance spread between Guidance and Application Guidance. Whilst we appreciate the challenges in drafting such documents, inconsistencies lead to a risk that stakeholders will struggle to understand the final Guidance and engage with it in a manner that will result in good quality reporting.
Whilst we fully commend the spirit of the INPAG project, we continue to have concerns with its scale in terms of the layers of complexity, optionality, and sheer volume of content. Given the amount of content that stakeholders will need to engage with, we believe there is a substantial risk that the overall project objective of producing high-quality financial reporting will not be achieved.
2. Smaller NPOs and scope of INPAG
Based on the various INPAG outreach activities, we understand that INPAG is not intended to be suitable for smaller NPOs to apply.
If INPAG is not intended to be suitable for smaller NPOs, then we suggest it may be worth considering clearly defining a smaller NPO in the final Guidance. It is fundamental that standard-setters make it clear to which entities a set of standards is intended to apply, so that there is clarity:
- when developing and finalising standards or guidance and considering what level of disclosure may be appropriate;
- for jurisdictions in future decision-making about whether to adopt INPAG; and
- for preparers if considering voluntary adoption of INPAG.
It will also be particularly important for individual jurisdictions to be able to understand how the scope of INPAG relates to any jurisdictional requirements to prepare accruals accounts, as drafted, the guidance implies that smaller entities are those for which cash accounting is sufficient to meet users' information needs.
3. Section 37 Supplementary Information
Whilst the focus of our response is on the general-purpose financial statements (GPFS), we consider that including supplementary information as an appendix to the GPFS may cause clutter for users of the financial statements. This is likely to cause confusion for users when some of the supplementary information is not subject to audit. As such we strongly recommend that either Section 37 Supplementary information and its related Practice Guide are published separately from INPAG, or that Section 37 is relocated to sit outside the main framework.
4. INPAG Implementation Guidance Annex A: Illustrative financial statements
Whilst there is merit in illustrative financial statements being available to aid preparers who may struggle with the requirements without any examples, there is an increased risk of boilerplate reporting which results in poorer quality financial reporting. We are not convinced that illustrative financial statements should be issued by standard setters, as this may have unintended consequences in terms of how preparers may interpret such supporting material, considering it a requirement, as opposed to following the accounting standards for their specific facts and circumstances. There are also challenges in providing illustrative financial statements to cover an international audience given that, in practice, entities may need to integrate the requirements of INPAG with jurisdictional requirements.
5. Areas of technical disagreement
Our response draws on the FRC's experience in developing accounting standards applicable in the UK and Republic of Ireland. This includes FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, which addresses issues specific to entities that may be categorised as NPOs. The requirements in FRS 102 were originally based on the IFRS for SMEs Accounting Standard, modified both in terms of the scope of entities eligible to apply it and the accounting treatments provided.[^1] The scope of FRS 102 includes Public Benefit Entities (PBEs) and therefore includes the most significant and relevant PBE-specific issues. As set out in the Appendix, we have some significant reservations about certain aspects of the proposals in relation to fund accounting, designated funds, classification and presentation of expenditure and accounting for support costs. Specifically:
INPAG Section 36 Fund accounting
Overall, we support the proposal in ED3 not to require the separate presentation of funds with restrictions and funds without restrictions on the face of the Statement of Income and Expenses (SOIE). However, we have some reservations on some of the proposals in Section 36 as we consider the current proposal to contradict the underlying principles of fund accounting. These have been noted below.
Internally designated funds
We agree with the INPAG proposals that internally designated funds should not be reported as funds with restrictions. However, the proposed drafting is ambiguous and inconsistent on whether INPAG considers that an internally designated fund should be disclosed separately from general funds. We note that internally designated funds may exist in an NPO, but these reflect no more than management intention. Such funds do not create a separate class of residual interest/net assets in the entity. In our view, any disclosure of internally-designated funds would be better located in the narrative reporting where it can be linked to the NPO's strategy and how that will be delivered. We suggest that the wording is reviewed to ensure it is consistent and in accordance with the principles of fund accounting.
Tracking income, expenses, assets and liabilities for each fund
We agree that, when a separate fund exists, it is necessary to track the income, expenses, assets and liabilities relating to that fund, otherwise it would not be possible to keep an accurate record of the fund's balance. However, the need to maintain records should not need to be specified in INPAG. This concept applies to all transactions, events or conditions that are reflected in the financial statements. However, if the existence of separate records is intended to be an indicator of whether a fund exists, the current INPAG drafting does not achieve this. Ultimately, the question of whether an NPO needs to track its transactions and maintain records is separate from the question of what it needs to present and disclose in its financial statements (which is usually at a more aggregated level). ED3 is not clear on how an NPO shall identify a separate fund for financial reporting purposes, as opposed to management control and reporting purposes. We suggest Section 36 is reviewed so that there is no ambiguity on this matter.
Support costs and fund accounting
We do not agree with the proposed approach which requires that support costs should be charged to a fund, even if inclusion of such costs is not permitted under the terms of any arrangement. Such an approach would be contrary to the definition of a fund with restrictions because it would imply that the funds are being depleted by support costs for which those funds are not allowed to be used. However, we acknowledge that for management reporting purposes, an NPO may wish to monitor the full cost of delivering the relevant activity and therefore may include all support costs. We suggest that the proposals are revisited so that the requirements cover only what is required for financial reporting purposes and should reinforce that reporting by activity (by function) should include support costs.
INPAG Section 24 Part II Classification of expenditure
We do not agree that there should be a rebuttable presumption in respect of classification of expenditure for disclosure purposes, nor that 'by nature' can be presumed to be the best form of presentation and disclosure of expenditure for an NPO.
We understand that the development of INPAG takes into account relevant IASB projects. At the time of publication of ED3 in May 2024, the IASB had recently issued IFRS 18 Presentation and Disclosure in Financial Statements, which we consider is relevant as it represents the latest developments by the IASB. It is not clear to what degree INPAG ED3 has taken into account the requirements of IFRS 18 in its final form. We think INPAG should take this into account when finalising its Guidance; at present INPAG appears to be diverging from the latest developments in this area.
The views expressed in our response to INPAG ED3 are separate from, and will not necessarily affect, the FRC's future development and maintenance of UK and Ireland financial reporting standards.
If you have any queries or would like to discuss our comments in more detail, please contact Stephen Maloney or Omadevi Jani at [email protected].
Yours sincerely
Mark Babington Executive Director, Regulatory Standards Direct telephone line: Email:
International Non-profit Accounting Guidance (INPAG) Exposure Draft 3 Response template
Response template
Please use this form to record your responses to the Specific Matters for Comment relating to INPAG Exposure Draft 3
Comments are most helpful if they:
- Address the question asked;
- Contain a clear explanation to support the response provided, whether this is agreeing or otherwise with any proposals made;
- Propose alternatives for consideration, where responses are not in agreement with the proposal made;
- Specify the INPAG paragraphs to which any comments relate; and
- Identify any wording in the proposals that might not be clear because of how they translate.
The text boxes will expand as required. There is no size limit. There are 11 question areas, according to the various sections in INPAG. You do not need to answer all questions and can choose to answer as many or as few as you wish. You may comment on any aspect of Exposure Draft, not just the specific matters identified. General comments should be added at the end of this document.
Responses must be received by 16 September 2024 and must be in English.
Responses can be submitted to [email protected] or through the website at www.ifr4npo.org/have-your-say
Respondent information:
| First name: | Mark | Country: (this should be the country in which you are based) | United Kingdom |
|---|---|---|---|
| Last name: | Babington | Professional interest: please choose from: | Accounting standard setter |
| Email: | • NPO, ie preparer of financial statements, | ||
| Position: | Executive Director, Regulatory Standards | • auditor, | |
| • accounting standard setter, | |||
| • professional accounting organisation, | |||
| Organisation: (who do you work for) | Financial Reporting Council | • regulator of NPOs, | |
| • donor, | |||
| • academic, | |||
| • civil society, | |||
| Response submitted: | • on behalf of my organisation | • user of NPO services, | |
| • other (please state) |
| Please indicate whether you wish to receive further information about this project and consent to being contacted at the email address provided. | Disagree |
|---|---|
This document has been designed purely to enable feedback to Exposure Draft 3. Participation is undertaken on an entirely voluntary basis. The responses will be used to shape the development of INPAG and not for any other purpose. We ask for your name and contact information to enable us to contact you if we should have any clarifications regarding your responses. Responses will be public, but personal contact information will not be disclosed. Personal information will only be held for the purposes of developing INPAG. You may withdraw your consent for us to hold any of your personal information at any time by contacting us at [email protected].
Specific Matters for Comment
Question 1: Fund accounting
INPAG Section 36 sets out the characteristics of a fund for the purposes of INPAG and whether a fund is presented in the financial statements as being with or without restrictions. A fund is presented as with restrictions where the use of resources is limited to a specific purpose or activity as a consequence of externally imposed legal or equivalent arrangements or where a fund is established for a fundraising campaign with an externally communicated commitment on the specific use for the funds. The guidance requires that the income, expenses, assets and liabilities associated with a fund are recorded. New disclosures are required for fund balances and movements in the year. INPAG Section 5 has been amended to remove the requirement to disclose funds with and without restrictions on the face of the Statement of Income and Expenses.
| 1 Fund accounting | References | Response ## International Non-profit Accounting Guidance (INPAG) Exposure Draft 3 Response
Karen Sanderson IFR4NPO Project Lead Chartered Institute of Public Finance and Accountancy 77 Mansell Street London E1 8AN
11 September 2024
Subject: International Non-Profit Accounting Guidance Exposure Draft 3 (‘INPAG ED3' or 'Guidance'): Invitation to comment
Dear Karen,
I am writing on behalf of the UK's Financial Reporting Council (FRC) in response to the above consultation.
We welcome the opportunity to contribute to your Guidance development process, both through our responses to consultations and our participation in the project's Technical Advisory Group. We are grateful to the project team for taking this project forward, and note that INPAG has the potential to contribute towards addressing the gaps that exist in international financial reporting frameworks in relation to non-profit organisations (NPOs). However, we do have significant concerns about the scale and complexity of the project which we believe poses a risk to achieving the main objective of supporting high-quality financial reporting.
Please note that we have not responded to every question in the invitation to comment. However, we have chosen to focus on what we consider the more pertinent matters, and where we consider our input to be most valuable to the INPAG project. Our detailed comments in response to INPAG ED3 are included in the Appendix to this letter. However, we would like to highlight some key themes here.
1. Overall quality and consistency of drafting and scale of INPAG project
During our review of ED3 and the previous EDs, we have noted a lack of consistency in various places in the proposed drafting. For instance, we noted inconsistencies between related paragraphs, between the Guidance and the Application Guidance, and between the Guidance and the Basis for Conclusions. We have also noted instances when the rationale is included in the Guidance, rather than the Basis for Conclusions. We recommend that INPAG reconsiders the way the rationale for its Guidance is expressed, and specifically reconsiders the balance between the Guidance itself and the Basis for Conclusions.
As previously mentioned in response to ED1, we suggest that INPAG should consider not having the guidance spread between Guidance and Application Guidance. Whilst we appreciate the challenges in drafting such documents, inconsistencies lead to a risk that stakeholders will struggle to understand the final Guidance and engage with it in a manner that will result in good quality reporting.
Whilst we fully commend the spirit of the INPAG project, we continue to have concerns with its scale in terms of the layers of complexity, optionality, and sheer volume of content. Given the amount of content that stakeholders will need to engage with, we believe there is a substantial risk that the overall project objective of producing high-quality financial reporting will not be achieved.
2. Smaller NPOs and scope of INPAG
Based on the various INPAG outreach activities, we understand that INPAG is not intended to be suitable for smaller NPOs to apply.
If INPAG is not intended to be suitable for smaller NPOs, then we suggest it may be worth considering clearly defining a smaller NPO in the final Guidance. It is fundamental that standard-setters make it clear to which entities a set of standards is intended to apply, so that there is clarity:
- when developing and finalising standards or guidance and considering what level of disclosure may be appropriate;
- for jurisdictions in future decision-making about whether to adopt INPAG; and
- for preparers if considering voluntary adoption of INPAG.
It will also be particularly important for individual jurisdictions to be able to understand how the scope of INPAG relates to any jurisdictional requirements to prepare accruals accounts, as drafted, the guidance implies that smaller entities are those for which cash accounting is sufficient to meet users' information needs.
3. Section 37 Supplementary Information
Whilst the focus of our response is on the general-purpose financial statements (GPFS), we consider that including supplementary information as an appendix to the GPFS may cause clutter for users of the financial statements. This is likely to cause confusion for users when some of the supplementary information is not subject to audit. As such we strongly recommend that either Section 37 Supplementary information and its related Practice Guide are published separately from INPAG, or that Section 37 is relocated to sit outside the main framework.
4. INPAG Implementation Guidance Annex A: Illustrative financial statements
Whilst there is merit in illustrative financial statements being available to aid preparers who may struggle with the requirements without any examples, there is an increased risk of boilerplate reporting which results in poorer quality financial reporting. We are not convinced that illustrative financial statements should be issued by standard setters, as this may have unintended consequences in terms of how preparers may interpret such supporting material, considering it a requirement, as opposed to following the accounting standards for their specific facts and circumstances. There are also challenges in providing illustrative financial statements to cover an international audience given that, in practice, entities may need to integrate the requirements of INPAG with jurisdictional requirements.
5. Areas of technical disagreement
Our response draws on the FRC's experience in developing accounting standards applicable in the UK and Republic of Ireland. This includes FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, which addresses issues specific to entities that may be categorised as NPOs. The requirements in FRS 102 were originally based on the IFRS for SMEs Accounting Standard, modified both in terms of the scope of entities eligible to apply it and the accounting treatments provided.[^1] The scope of FRS 102 includes Public Benefit Entities (PBEs) and therefore includes the most significant and relevant PBE-specific issues. As set out in the Appendix, we have some significant reservations about certain aspects of the proposals in relation to fund accounting, designated funds, classification and presentation of expenditure and accounting for support costs. Specifically:
INPAG Section 36 Fund accounting
Overall, we support the proposal in ED3 not to require the separate presentation of funds with restrictions and funds without restrictions on the face of the Statement of Income and Expenses (SOIE). However, we have some reservations on some of the proposals in Section 36 as we consider the current proposal to contradict the underlying principles of fund accounting. These have been noted below.
Internally designated funds
We agree with the INPAG proposals that internally designated funds should not be reported as funds with restrictions. However, the proposed drafting is ambiguous and inconsistent on whether INPAG considers that an internally designated fund should be disclosed separately from general funds. We note that internally designated funds may exist in an NPO, but these reflect no more than management intention. Such funds do not create a separate class of residual interest/net assets in the entity. In our view, any disclosure of internally-designated funds would be better located in the narrative reporting where it can be linked to the NPO's strategy and how that will be delivered. We suggest that the wording is reviewed to ensure it is consistent and in accordance with the principles of fund accounting.
Tracking income, expenses, assets and liabilities for each fund
We agree that, when a separate fund exists, it is necessary to track the income, expenses, assets and liabilities relating to that fund, otherwise it would not be possible to keep an accurate record of the fund's balance. However, the need to maintain records should not need to be specified in INPAG. This concept applies to all transactions, events or conditions that are reflected in the financial statements. However, if the existence of separate records is intended to be an indicator of whether a fund exists, the current INPAG drafting does not achieve this. Ultimately, the question of whether an NPO needs to track its transactions and maintain records is separate from the question of what it needs to present and disclose in its financial statements (which is usually at a more aggregated level). ED3 is not clear on how an NPO shall identify a separate fund for financial reporting purposes, as opposed to management control and reporting purposes. We suggest Section 36 is reviewed so that there is no ambiguity on this matter.
Support costs and fund accounting
We do not agree with the proposed approach which requires that support costs should be charged to a fund, even if inclusion of such costs is not permitted under the terms of any arrangement. Such an approach would be contrary to the definition of a fund with restrictions because it would imply that the funds are being depleted by support costs for which those funds are not allowed to be used. However, we acknowledge that for management reporting purposes, an NPO may wish to monitor the full cost of delivering the relevant activity and therefore may include all support costs. We suggest that the proposals are revisited so that the requirements cover only what is required for financial reporting purposes and should reinforce that reporting by activity (by function) should include support costs.
INPAG Section 24 Part II Classification of expenditure
We do not agree that there should be a rebuttable presumption in respect of classification of expenditure for disclosure purposes, nor that 'by nature' can be presumed to be the best form of presentation and disclosure of expenditure for an NPO.
We understand that the development of INPAG takes into account relevant IASB projects. At the time of publication of ED3 in May 2024, the IASB had recently issued IFRS 18 Presentation and Disclosure in Financial Statements, which we consider is relevant as it represents the latest developments by the IASB. It is not clear to what degree INPAG ED3 has taken into account the requirements of IFRS 18 in its final form. We think INPAG should take this into account when finalising its Guidance; at present INPAG appears to be diverging from the latest developments in this area.
The views expressed in our response to INPAG ED3 are separate from, and will not necessarily affect, the FRC's future development and maintenance of UK and Ireland financial reporting standards.
If you have any queries or would like to discuss our comments in more detail, please contact Stephen Maloney or Omadevi Jani at [email protected].
Yours sincerely
Mark Babington Executive Director, Regulatory Standards Direct telephone line: Email:
International Non-profit Accounting Guidance (INPAG) Exposure Draft 3 Response template
Response template
Please use this form to record your responses to the Specific Matters for Comment relating to INPAG Exposure Draft 3
Comments are most helpful if they:
- Address the question asked;
- Contain a clear explanation to support the response provided, whether this is agreeing or otherwise with any proposals made;
- Propose alternatives for consideration, where responses are not in agreement with the proposal made;
- Specify the INPAG paragraphs to which any comments relate; and
- Identify any wording in the proposals that might not be clear because of how they translate.
The text boxes will expand as required. There is no size limit. There are 11 question areas, according to the various sections in INPAG. You do not need to answer all questions and can choose to answer as many or as few as you wish. You may comment on any aspect of Exposure Draft, not just the specific matters identified. General comments should be added at the end of this document.
Responses must be received by 16 September 2024 and must be in English.
Responses can be submitted to [email protected] or through the website at www.ifr4npo.org/have-your-say
Respondent information:
| First name: | Mark | Country: (this should be the country in which you are based) | United Kingdom |
|---|---|---|---|
| Last name: | Babington | Professional interest: please choose from: | Accounting standard setter |
| Email: | • NPO, ie preparer of financial statements, | ||
| Position: | Executive Director, Regulatory Standards | • auditor, | |
| • accounting standard setter, | |||
| • professional accounting organisation, | |||
| Organisation: (who do you work for) | Financial Reporting Council | • regulator of NPOs, | |
| • donor, | |||
| • academic, | |||
| • civil society, | |||
| Response submitted: | • on behalf of my organisation | • user of NPO services, | |
| • other (please state) |
| Please indicate whether you wish to receive further information about this project and consent to being contacted at the email address provided. | Disagree |
|---|---|
This document has been designed purely to enable feedback to Exposure Draft 3. Participation is undertaken on an entirely voluntary basis. The responses will be used to shape the development of INPAG and not for any other purpose. We ask for your name and contact information to enable us to contact you if we should have any clarifications regarding your responses. Responses will be public, but personal contact information will not be disclosed. Personal information will only be held for the purposes of developing INPAG. You may withdraw your consent for us to hold any of your personal information at any time by contacting us at [email protected].
Specific Matters for Comment
Question 1: Fund accounting
INPAG Section 36 sets out the characteristics of a fund for the purposes of INPAG and whether a fund is presented in the financial statements as being with or without restrictions. A fund is presented as with restrictions where the use of resources is limited to a specific purpose or activity as a consequence of externally imposed legal or equivalent arrangements or where a fund is established for a fundraising campaign with an externally communicated commitment on the specific use for the funds. The guidance requires that the income, expenses, assets and liabilities associated with a fund are recorded. New disclosures are required for fund balances and movements in the year. INPAG Section 5 has been amended to remove the requirement to disclose funds with and without restrictions on the face of the Statement of Income and Expenses.
| 1 Fund accounting | References | Response ## International Non-profit Accounting Guidance (INPAG) Exposure Draft 3 Response
Karen Sanderson IFR4NPO Project Lead Chartered Institute of Public Finance and Accountancy 77 Mansell Street London E1 8AN
11 September 2024
Subject: International Non-Profit Accounting Guidance Exposure Draft 3 (‘INPAG ED3' or 'Guidance'): Invitation to comment
Dear Karen,
I am writing on behalf of the UK's Financial Reporting Council (FRC) in response to the above consultation.
We welcome the opportunity to contribute to your Guidance development process, both through our responses to consultations and our participation in the project's Technical Advisory Group. We are grateful to the project team for taking this project forward, and note that INPAG has the potential to contribute towards addressing the gaps that exist in international financial reporting frameworks in relation to non-profit organisations (NPOs). However, we do have significant concerns about the scale and complexity of the project which we believe poses a risk to achieving the main objective of supporting high-quality financial reporting.
Please note that we have not responded to every question in the invitation to comment. However, we have chosen to focus on what we consider the more pertinent matters, and where we consider our input to be most valuable to the INPAG project. Our detailed comments in response to INPAG ED3 are included in the Appendix to this letter. However, we would like to highlight some key themes here.
1. Overall quality and consistency of drafting and scale of INPAG project
During our review of ED3 and the previous EDs, we have noted a lack of consistency in various places in the proposed drafting. For instance, we noted inconsistencies between related paragraphs, between the Guidance and the Application Guidance, and between the Guidance and the Basis for Conclusions. We have also noted instances when the rationale is included in the Guidance, rather than the Basis for Conclusions. We recommend that INPAG reconsiders the way the rationale for its Guidance is expressed, and specifically reconsiders the balance between the Guidance itself and the Basis for Conclusions.
As previously mentioned in response to ED1, we suggest that INPAG should consider not having the guidance spread between Guidance and Application Guidance. Whilst we appreciate the challenges in drafting such documents, inconsistencies lead to a risk that stakeholders will struggle to understand the final Guidance and engage with it in a manner that will result in good quality reporting.
Whilst we fully commend the spirit of the INPAG project, we continue to have concerns with its scale in terms of the layers of complexity, optionality, and sheer volume of content. Given the amount of content that stakeholders will need to engage with, we believe there is a substantial risk that the overall project objective of producing high-quality financial reporting will not be achieved.
2. Smaller NPOs and scope of INPAG
Based on the various INPAG outreach activities, we understand that INPAG is not intended to be suitable for smaller NPOs to apply.
If INPAG is not intended to be suitable for smaller NPOs, then we suggest it may be worth considering clearly defining a smaller NPO in the final Guidance. It is fundamental that standard-setters make it clear to which entities a set of standards is intended to apply, so that there is clarity:
- when developing and finalising standards or guidance and considering what level of disclosure may be appropriate;
- for jurisdictions in future decision-making about whether to adopt INPAG; and
- for preparers if considering voluntary adoption of INPAG.
It will also be particularly important for individual jurisdictions to be able to understand how the scope of INPAG relates to any jurisdictional requirements to prepare accruals accounts, as drafted, the guidance implies that smaller entities are those for which cash accounting is sufficient to meet users' information needs.
3. Section 37 Supplementary Information
Whilst the focus of our response is on the general-purpose financial statements (GPFS), we consider that including supplementary information as an appendix to the GPFS may cause clutter for users of the financial statements. This is likely to cause confusion for users when some of the supplementary information is not subject to audit. As such we strongly recommend that either Section 37 Supplementary information and its related Practice Guide are published separately from INPAG, or that Section 37 is relocated to sit outside the main framework.
4. INPAG Implementation Guidance Annex A: Illustrative financial statements
Whilst there is merit in illustrative financial statements being available to aid preparers who may struggle with the requirements without any examples, there is an increased risk of boilerplate reporting which results in poorer quality financial reporting. We are not convinced that illustrative financial statements should be issued by standard setters, as this may have unintended consequences in terms of how preparers may interpret such supporting material, considering it a requirement, as opposed to following the accounting standards for their specific facts and circumstances. There are also challenges in providing illustrative financial statements to cover an international audience given that, in practice, entities may need to integrate the requirements of INPAG with jurisdictional requirements.
5. Areas of technical disagreement
Our response draws on the FRC's experience in developing accounting standards applicable in the UK and Republic of Ireland. This includes FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, which addresses issues specific to entities that may be categorised as NPOs. The requirements in FRS 102 were originally based on the IFRS for SMEs Accounting Standard, modified both in terms of the scope of entities eligible to apply it and the accounting treatments provided.[^1] The scope of FRS 102 includes Public Benefit Entities (PBEs) and therefore includes the most significant and relevant PBE-specific issues. As set out in the Appendix, we have some significant reservations about certain aspects of the proposals in relation to fund accounting, designated funds, classification and presentation of expenditure and accounting for support costs. Specifically:
INPAG Section 36 Fund accounting
Overall, we support the proposal in ED3 not to require the separate presentation of funds with restrictions and funds without restrictions on the face of the Statement of Income and Expenses (SOIE). However, we have some reservations on some of the proposals in Section 36 as we consider the current proposal to contradict the underlying principles of fund accounting. These have been noted below.
Internally designated funds
We agree with the INPAG proposals that internally designated funds should not be reported as funds with restrictions. However, the proposed drafting is ambiguous and inconsistent on whether INPAG considers that an internally designated fund should be disclosed separately from general funds. We note that internally designated funds may exist in an NPO, but these reflect no more than management intention. Such funds do not create a separate class of residual interest/net assets in the entity. In our view, any disclosure of internally-designated funds would be better located in the narrative reporting where it can be linked to the NPO's strategy and how that will be delivered. We suggest that the wording is reviewed to ensure it is consistent and in accordance with the principles of fund accounting.
Tracking income, expenses, assets and liabilities for each fund
We agree that, when a separate fund exists, it is necessary to track the income, expenses, assets and liabilities relating to that fund, otherwise it would not be possible to keep an accurate record of the fund's balance. However, the need to maintain records should not need to be specified in INPAG. This concept applies to all transactions, events or conditions that are reflected in the financial statements. However, if the existence of separate records is intended to be an indicator of whether a fund exists, the current INPAG drafting does not achieve this. Ultimately, the question of whether an NPO needs to track its transactions and maintain records is separate from the question of what it needs to present and disclose in its financial statements (which is usually at a more aggregated level). ED3 is not clear on how an NPO shall identify a separate fund for financial reporting purposes, as opposed to management control and reporting purposes. We suggest Section 36 is reviewed so that there is no ambiguity on this matter.
Support costs and fund accounting
We do not agree with the proposed approach which requires that support costs should be charged to a fund, even if inclusion of such costs is not permitted under the terms of any arrangement. Such an approach would be contrary to the definition of a fund with restrictions because it would imply that the funds are being depleted by support costs for which those funds are not allowed to be used. However, we acknowledge that for management reporting purposes, an NPO may wish to monitor the full cost of delivering the relevant activity and therefore may include all support costs. We suggest that the proposals are revisited so that the requirements cover only what is required for financial reporting purposes and should reinforce that reporting by activity (by function) should include support costs.
INPAG Section 24 Part II Classification of expenditure
We do not agree that there should be a rebuttable presumption in respect of classification of expenditure for disclosure purposes, nor that 'by nature' can be presumed to be the best form of presentation and disclosure of expenditure for an NPO.
We understand that the development of INPAG takes into account relevant IASB projects. At the time of publication of ED3 in May 2024, the IASB had recently issued IFRS 18 Presentation and Disclosure in Financial Statements, which we consider is relevant as it represents the latest developments by the IASB. It is not clear to what degree INPAG ED3 has taken into account the requirements of IFRS 18 in its final form. We think INPAG should take this into account when finalising its Guidance; at present INPAG appears to be diverging from the latest developments in this area.
The views expressed in our response to INPAG ED3 are separate from, and will not necessarily affect, the FRC's future development and maintenance of UK and Ireland financial reporting standards.
If you have any queries or would like to discuss our comments in more detail, please contact Stephen Maloney or Omadevi Jani at [email protected].
Yours sincerely
Mark Babington Executive Director, Regulatory Standards Direct telephone line: Email:
International Non-profit Accounting Guidance (INPAG) Exposure Draft 3 Response template
Response template
Please use this form to record your responses to the Specific Matters for Comment relating to INPAG Exposure Draft 3
Comments are most helpful if they:
- Address the question asked;
- Contain a clear explanation to support the response provided, whether this is agreeing or otherwise with any proposals made;
- Propose alternatives for consideration, where responses are not in agreement with the proposal made;
- Specify the INPAG paragraphs to which any comments relate; and
- Identify any wording in the proposals that might not be clear because of how they translate.
The text boxes will expand as required. There is no size limit. There are 11 question areas, according to the various sections in INPAG. You do not need to answer all questions and can choose to answer as many or as few as you wish. You may comment on any aspect of Exposure Draft, not just the specific matters identified. General comments should be added at the end of this document.
Responses must be received by 16 September 2024 and must be in English.
Responses can be submitted to [email protected] or through the website at www.ifr4npo.org/have-your-say
Respondent information:
| First name: | Mark | Country: (this should be the country in which you are based) | United Kingdom |
|---|---|---|---|
| Last name: | Babington | Professional interest: please choose from: | Accounting standard setter |
| Email: | • NPO, ie preparer of financial statements, | ||
| Position: | Executive Director, Regulatory Standards | • auditor, | |
| • accounting standard setter, | |||
| • professional accounting organisation, | |||
| Organisation: (who do you work for) | Financial Reporting Council | • regulator of NPOs, | |
| • donor, | |||
| • academic, | |||
| • civil society, | |||
| Response submitted: | • on behalf of my organisation | • user of NPO services, | |
| • other (please state) |
| Please indicate whether you wish to receive further information about this project and consent to being contacted at the email address provided. | Disagree |
|---|---|
This document has been designed purely to enable feedback to Exposure Draft 3. Participation is undertaken on an entirely voluntary basis. The responses will be used to shape the development of INPAG and not for any other purpose. We ask for your name and contact information to enable us to contact you if we should have any clarifications regarding your responses. Responses will be public, but personal contact information will not be disclosed. Personal information will only be held for the purposes of developing INPAG. You may withdraw your consent for us to hold any of your personal information at any time by contacting us at [email protected].
Specific Matters for Comment
Question 1: Fund accounting
INPAG Section 36 sets out the characteristics of a fund for the purposes of INPAG and whether a fund is presented in the financial statements as being with or without restrictions. A fund is presented as with restrictions where the use of resources is limited to a specific purpose or activity as a consequence of externally imposed legal or equivalent arrangements or where a fund is established for a fundraising campaign with an externally communicated commitment on the specific use for the funds. The guidance requires that the income, expenses, assets and liabilities associated with a fund are recorded. New disclosures are required for fund balances and movements in the year. INPAG Section 5 has been amended to remove the requirement to disclose funds with and without restrictions on the face of the Statement of Income and Expenses.
| 1 Fund accounting | References | Response | |:------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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The following is a breakdown of the overall structure and content within these different categories:
1. Project Initiation & Planning:
- Understanding the Scope and Objectives: Begin by thoroughly understanding the goals of the web accessibility audit. What standards (e.g., WCAG 2.1, WCAG 2.2, Section 508) are being targeted? What is the scope (e.g., entire website, specific applications, user flows)? Who are the primary user groups (e.g., visually impaired, motor impaired, cognitively impaired)?
- Defining User Stories/Scenarios: Create or adapt user stories that incorporate accessibility considerations for diverse user groups. This helps ground the audit in real-world usage.
- Tool and Methodology Selection: Determine the appropriate mix of automated tools, manual testing techniques, and assistive technologies to use. Plan the testing approach (e.g., page-by-page, component-based, user-flow-based).
- Team Roles and Responsibilities: Assign clear roles for the audit team members (e.g., lead auditor, manual tester, AT specialist, documentation specialist).
2. Automated Accessibility Testing:
- Initial Scan: Use automated tools (e.g., Lighthouse, axe DevTools, WAVE, Siteimprove) to quickly identify obvious and common accessibility issues across a broad range of pages or components.
- Reporting: Generate reports from these tools, noting the types and locations of issues.
- Limitations Awareness: Understand that automated tools can only catch a fraction (typically 20-40%) of accessibility issues. They are good for initial identification but insufficient for comprehensive audits.
3. Manual Accessibility Testing (Core of the Audit):
This is where the bulk of the expertise and time is spent, covering aspects automated tools miss.
- Keyboard Navigation Testing:
- Tab Order: Ensure all interactive elements (links, buttons, form fields) are reachable and navigable in a logical order using only the Tab key.
- Focus Indicators: Verify visible and clear focus indicators for all interactive elements.
- Keyboard Operability: Confirm all functionality can be activated and controlled using keyboard equivalents (Enter, Space, arrow keys). No "keyboard traps."
- Screen Reader Testing:
- Content Comprehension: Use screen readers (e.g., NVDA, JAWS, VoiceOver, Narrator) to navigate and interact with the website. Evaluate if the content makes sense when read aloud.
- Semantic Structure: Check for proper use of headings (
<h1>to<h6>), lists (<ul markdown="1">,<ol markdown="1">), landmarks (<main markdown="1">,<nav markdown="1">,<aside markdown="1">,<header markdown="1">,<footer markdown="1">), and other semantic HTML. - Alternative Text: Verify descriptive and concise
alttext for all meaningful images. Images purely for decoration should havealt=""or be implemented via CSS. - Link & Button Text: Ensure link and button texts are descriptive and make sense out of context (e.g., "Read more about our services" instead of "Click here").
- Form Accessibility: Test form labels, instructions, error messages, and required fields are correctly associated and announced.
- ARIA Attributes: Validate correct and appropriate use of WAI-ARIA roles, states, and properties where native HTML is insufficient (e.g., custom widgets, dynamic content updates).
- Color Contrast Testing:
- Use color contrast checkers (e.g., WebAIM Contrast Checker, axe DevTools) to ensure sufficient contrast ratios for all text and important graphical elements against their background, meeting WCAG AA or AAA requirements.
- Check for color not being the sole means of conveying information.
- Responsive Design & Zoom Testing:
- Test content reflows correctly at different screen sizes and zoom levels (up to 200% without loss of content or functionality).
- Multimedia Accessibility:
- Captions/Transcripts: Verify captions for videos (synchronized) and transcripts for audio-only content.
- Audio Descriptions: Check for audio descriptions for videos where visual information is critical but not conveyed through the main audio.
- Time-based Media (if applicable):
- Ensure any time limits for content or interactions can be extended, adjusted, or turned off by the user.
- Language & Readability:
- Verify
langattribute is correctly set at the document level. - Identify any changes in language and ensure they are marked up (e.g.,
<span lang="fr">Bonjour</span>). - Assess readability and clarity of text, especially for users with cognitive disabilities.
- Verify
- Error Identification & Suggestions:
- Document detailed steps to reproduce each issue.
- For each identified issue, reference the relevant WCAG success criterion.
- Provide clear, actionable recommendations for remediation, ideally with code examples or best practices.
4. Reporting & Documentation:
- Comprehensive Audit Report: Consolidate all findings into a structured report.
- Executive Summary: High-level overview of findings, key strengths, and major areas for improvement.
- Methodology: Detail the tools, techniques, and scope of the audit.
- Detailed Findings: A list of all accessibility issues, categorized by WCAG criterion, severity, and priority. Each finding should include:
- Description of the issue.
- Location (URL, component, code snippet).
- Impact on users with disabilities.
- Relevant WCAG success criterion (e.g., "WCAG 2.1 AA 1.1.1 Non-text Content").
- Recommended remediation steps.
- Screenshot or video (if helpful).
- Recommendations: Prioritized list of actionable steps for remediation, categorized by effort/impact.
- Next Steps: Suggest a roadmap for ongoing accessibility efforts, including training, further testing, and integration into the development lifecycle.
- Accessibility Statement (if applicable): Draft or review the website's accessibility statement, ensuring it accurately reflects the current status and commitment to accessibility.
- Developer-Friendly Documentation: Provide concise, component-level documentation for developers outlining how to build accessible components and common pitfalls to avoid.
5. Post-Audit Activities:
- Review and Clarification: Present the findings to stakeholders, answer questions, and clarify recommendations.
- Re-testing/Verification: After remediation, conduct follow-up testing to verify that issues have been resolved and no new regressions have been introduced.
- Ongoing Strategy: Help establish an ongoing accessibility strategy, including continuous testing, accessibility training, and incorporating accessibility into the SDLC.
This structured approach ensures a thorough, reliable, and actionable web accessibility audit.Karen Sanderson IFR4NPO Project Lead Chartered Institute of Public Finance and Accountancy 77 Mansell Street London E1 8AN
11 September 2024
Subject: International Non-Profit Accounting Guidance Exposure Draft 3 (‘INPAG ED3' or 'Guidance'): Invitation to comment
Dear Karen,
I am writing on behalf of the UK's Financial Reporting Council (FRC) in response to the above consultation.
We welcome the opportunity to contribute to your Guidance development process, both through our responses to consultations and our participation in the project's Technical Advisory Group. We are grateful to the project team for taking this project forward, and note that INPAG has the potential to contribute towards addressing the gaps that exist in international financial reporting frameworks in relation to non-profit organisations (NPOs). However, we do have significant concerns about the scale and complexity of the project which we believe poses a risk to achieving the main objective of supporting high-quality financial reporting.
Please note that we have not responded to every question in the invitation to comment. However, we have chosen to focus on what we consider the more pertinent matters, and where we consider our input to be most valuable to the INPAG project. Our detailed comments in response to INPAG ED3 are included in the Appendix to this letter. However, we would like to highlight some key themes here.
1. Overall quality and consistency of drafting and scale of INPAG project
During our review of ED3 and the previous EDs, we have noted a lack of consistency in various places in the proposed drafting. For instance, we noted inconsistencies between related paragraphs, between the Guidance and the Application Guidance, and between the Guidance and the Basis for Conclusions. We have also noted instances when the rationale is included in the Guidance, rather than the Basis for Conclusions. We recommend that INPAG reconsiders the way the rationale for its Guidance is expressed, and specifically reconsiders the balance between the Guidance itself and the Basis for Conclusions.
As previously mentioned in response to ED1, we suggest that INPAG should consider not having the guidance spread between Guidance and Application Guidance. Whilst we appreciate the challenges in drafting such documents, inconsistencies lead to a risk that stakeholders will struggle to understand the final Guidance and engage with it in a manner that will result in good quality reporting.
Whilst we fully commend the spirit of the INPAG project, we continue to have concerns with its scale in terms of the layers of complexity, optionality, and sheer volume of content. Given the amount of content that stakeholders will need to engage with, we believe there is a substantial risk that the overall project objective of producing high-quality financial reporting will not be achieved.
2. Smaller NPOs and scope of INPAG
Based on the various INPAG outreach activities, we understand that INPAG is not intended to be suitable for smaller NPOs to apply.
If INPAG is not intended to be suitable for smaller NPOs, then we suggest it may be worth considering clearly defining a smaller NPO in the final Guidance. It is fundamental that standard-setters make it clear to which entities a set of standards is intended to apply, so that there is clarity:
- when developing and finalising standards or guidance and considering what level of disclosure may be appropriate;
- for jurisdictions in future decision-making about whether to adopt INPAG; and
- for preparers if considering voluntary adoption of INPAG.
It will also be particularly important for individual jurisdictions to be able to understand how the scope of INPAG relates to any jurisdictional requirements to prepare accruals accounts, as drafted, the guidance implies that smaller entities are those for which cash accounting is sufficient to meet users' information needs.
3. Section 37 Supplementary Information
Whilst the focus of our response is on the general-purpose financial statements (GPFS), we consider that including supplementary information as an appendix to the GPFS may cause clutter for users of the financial statements. This is likely to cause confusion for users when some of the supplementary information is not subject to audit. As such we strongly recommend that either Section 37 Supplementary information and its related Practice Guide are published separately from INPAG, or that Section 37 is relocated to sit outside the main framework.
4. INPAG Implementation Guidance Annex A: Illustrative financial statements
Whilst there is merit in illustrative financial statements being available to aid preparers who may struggle with the requirements without any examples, there is an increased risk of boilerplate reporting which results in poorer quality financial reporting. We are not convinced that illustrative financial statements should be issued by standard setters, as this may have unintended consequences in terms of how preparers may interpret such supporting material, considering it a requirement, as opposed to following the accounting standards for their specific facts and circumstances. There are also challenges in providing illustrative financial statements to cover an international audience given that, in practice, entities may need to integrate the requirements of INPAG with jurisdictional requirements.
5. Areas of technical disagreement
Our response draws on the FRC's experience in developing accounting standards applicable in the UK and Republic of Ireland. This includes FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, which addresses issues specific to entities that may be categorised as NPOs. The requirements in FRS 102 were originally based on the IFRS for SMEs Accounting Standard, modified both in terms of the scope of entities eligible to apply it and the accounting treatments provided.[^1] The scope of FRS 102 includes Public Benefit Entities (PBEs) and therefore includes the most significant and relevant PBE-specific issues. As set out in the Appendix, we have some significant reservations about certain aspects of the proposals in relation to fund accounting, designated funds, classification and presentation of expenditure and accounting for support costs. Specifically:
INPAG Section 36 Fund accounting
Overall, we support the proposal in ED3 not to require the separate presentation of funds with restrictions and funds without restrictions on the face of the Statement of Income and Expenses (SOIE). However, we have some reservations on some of the proposals in Section 36 as we consider the current proposal to contradict the underlying principles of fund accounting. These have been noted below.
Internally designated funds
We agree with the INPAG proposals that internally designated funds should not be reported as funds with restrictions. However, the proposed drafting is ambiguous and inconsistent on whether INPAG considers that an internally designated fund should be disclosed separately from general funds. We note that internally designated funds may exist in an NPO, but these reflect no more than management intention. Such funds do not create a separate class of residual interest/net assets in the entity. In our view, any disclosure of internally-designated funds would be better located in the narrative reporting where it can be linked to the NPO's strategy and how that will be delivered. We suggest that the wording is reviewed to ensure it is consistent and in accordance with the principles of fund accounting.
Tracking income, expenses, assets and liabilities for each fund
We agree that, when a separate fund exists, it is necessary to track the income, expenses, assets and liabilities relating to that fund, otherwise it would not be possible to keep an accurate record of the fund's balance. However, the need to maintain records should not need to be specified in INPAG. This concept applies to all transactions, events or conditions that are reflected in the financial statements. However, if the existence of separate records is intended to be an indicator of whether a fund exists, the current INPAG drafting does not achieve this. Ultimately, the question of whether an NPO needs to track its transactions and maintain records is separate from the question of what it needs to present and disclose in its financial statements (which is usually at a more aggregated level). ED3 is not clear on how an NPO shall identify a separate fund for financial reporting purposes, as opposed to management control and reporting purposes. We suggest Section 36 is reviewed so that there is no ambiguity on this matter.
Support costs and fund accounting
We do not agree with the proposed approach which requires that support costs should be charged to a fund, even if inclusion of such costs is not permitted under the terms of any arrangement. Such an approach would be contrary to the definition of a fund with restrictions because it would imply that the funds are being depleted by support costs for which those funds are not allowed to be used. However, we acknowledge that for management reporting purposes, an NPO may wish to monitor the full cost of delivering the relevant activity and therefore may include all support costs. We suggest that the proposals are revisited so that the requirements cover only what is required for financial reporting purposes and should reinforce that reporting by activity (by function) should include support costs.
INPAG Section 24 Part II Classification of expenditure
We do not agree that there should be a rebuttable presumption in respect of classification of expenditure for disclosure purposes, nor that 'by nature' can be presumed to be the best form of presentation and disclosure of expenditure for an NPO.
We understand that the development of INPAG takes into account relevant IASB projects. At the time of publication of ED3 in May 2024, the IASB had recently issued IFRS 18 Presentation and Disclosure in Financial Statements, which we consider is relevant as it represents the latest developments by the IASB. It is not clear to what degree INPAG ED3 has taken into account the requirements of IFRS 18 in its final form. We think INPAG should take this into account when finalising its Guidance; at present INPAG appears to be diverging from the latest developments in this area.
The views expressed in our response to INPAG ED3 are separate from, and will not necessarily affect, the FRC's future development and maintenance of UK and Ireland financial reporting standards.
If you have any queries or would like to discuss our comments in more detail, please contact Stephen Maloney or Omadevi Jani at [email protected].
Yours sincerely
Mark Babington Executive Director, Regulatory Standards Direct telephone line: Email:
International Non-profit Accounting Guidance (INPAG) Exposure Draft 3 Response template
Response template
Please use this form to record your responses to the Specific Matters for Comment relating to INPAG Exposure Draft 3
Comments are most helpful if they:
- Address the question asked;
- Contain a clear explanation to support the response provided, whether this is agreeing or otherwise with any proposals made;
- Propose alternatives for consideration, where responses are not in agreement with the proposal made;
- Specify the INPAG paragraphs to which any comments relate; and
- Identify any wording in the proposals that might not be clear because of how they translate.
The text boxes will expand as required. There is no size limit. There are 11 question areas, according to the various sections in INPAG. You do not need to answer all questions and can choose to answer as many or as few as you wish. You may comment on any aspect of Exposure Draft, not just the specific matters identified. General comments should be added at the end of this document.
Responses must be received by 16 September 2024 and must be in English.
Responses can be submitted to [email protected] or through the website at www.ifr4npo.org/have-your-say
Respondent information:
| First name: | Mark | Country: (this should be the country in which you are based) | United Kingdom |
|---|---|---|---|
| Last name: | Babington | Professional interest: please choose from: | Accounting standard setter |
| Email: | • NPO, ie preparer of financial statements, | ||
| Position: | Executive Director, Regulatory Standards | • auditor, | |
| • accounting standard setter, | |||
| • professional accounting organisation, | |||
| Organisation: (who do you work for) | Financial Reporting Council | • regulator of NPOs, | |
| • donor, | |||
| • academic, | |||
| • civil society, | |||
| Response submitted: | • on behalf of my organisation | • user of NPO services, | |
| • other (please state) |
| Please indicate whether you wish to receive further information about this project and consent to being contacted at the email address provided. | Disagree |
|---|---|
This document has been designed purely to enable feedback to Exposure Draft 3. Participation is undertaken on an entirely voluntary basis. The responses will be used to shape the development of INPAG and not for any other purpose. We ask for your name and contact information to enable us to contact you if we should have any clarifications regarding your responses. Responses will be public, but personal contact information will not be disclosed. Personal information will only be held for the purposes of developing INPAG. You may withdraw your consent for us to hold any of your personal information at any time by contacting us at [email protected].
Specific Matters for Comment
Question 1: Fund accounting
INPAG Section 36 sets out the characteristics of a fund for the purposes of INPAG and whether a fund is presented in the financial statements as being with or without restrictions. A fund is presented as with restrictions where the use of resources is limited to a specific purpose or activity as a consequence of externally imposed legal or equivalent arrangements or where a fund is established for a fundraising campaign with an externally communicated commitment on the specific use for the funds. The guidance requires that the income, expenses, assets and liabilities associated with a fund are recorded. New disclosures are required for fund balances and movements in the year. INPAG Section 5 has been amended to remove the requirement to disclose funds with and without restrictions on the face of the Statement of Income and Expenses.
| 1 Fund accounting | References | Response |----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2. Automated Accessibility Testing:
- Initial Scan: Use automated tools (e.g., Lighthouse, axe DevTools, WAVE, Siteimprove) to quickly identify obvious and common accessibility issues across a broad range of pages or components.
- Reporting: Generate reports from these tools, noting the types and locations of issues.
- Limitations Awareness: Understand that automated tools can only catch a fraction (typically 20-40%) of accessibility issues. They are good for initial identification but insufficient for comprehensive audits.
3. Manual Accessibility Testing (Core of the Audit):
This is where the bulk of the expertise and time is spent, covering aspects automated tools miss.
- Keyboard Navigation Testing:
- Tab Order: Ensure all interactive elements (links, buttons, form fields) are reachable and navigable in a logical order using only the Tab key.
- Focus Indicators: Verify visible and clear focus indicators for all interactive elements.
- Keyboard Operability: Confirm all functionality can be activated and controlled using keyboard equivalents (Enter, Space, arrow keys). No "keyboard traps."
- Screen Reader Testing:
- Content Comprehension: Use screen readers (e.g., NVDA, JAWS, VoiceOver, Narrator) to navigate and interact with the website. Evaluate if the content makes sense when read aloud.
- Semantic Structure: Check for proper use of headings (
<h1>to<h6>), lists (<ul markdown="1">,<ol markdown="1">), landmarks (<main markdown="1">,<nav markdown="1">,<aside markdown="1">,<header markdown="1">,<footer markdown="1">), and other semantic HTML. - Alternative Text: Verify descriptive and concise
alttext for all meaningful images. Images purely for decoration should havealt=""or be implemented via CSS. - Link & Button Text: Ensure link and button texts are descriptive and make sense out of context (e.g., "Read more about our services" instead of "Click here").
- Form Accessibility: Test form labels, instructions, error messages, and required fields are correctly associated and announced.
- ARIA Attributes: Validate correct and appropriate use of WAI-ARIA roles, states, and properties where native HTML is insufficient (e.g., custom widgets, dynamic content updates).
- Color Contrast Testing:
- Use color contrast checkers (e.g., WebAIM Contrast Checker, axe DevTools) to ensure sufficient contrast ratios for all text and important graphical elements against their background, meeting WCAG AA or AAA requirements.
- Check for color not being the sole means of conveying information.
- Responsive Design & Zoom Testing:
- Test content reflows correctly at different screen sizes and zoom levels (up to 200% without loss of content or functionality).
- Multimedia Accessibility:
- Captions/Transcripts: Verify captions for videos (synchronized) and transcripts for audio-only content.
- Audio Descriptions: Check for audio descriptions for videos where visual information is critical but not conveyed through the main audio.
- Time-based Media (if applicable):
- Ensure any time limits for content or interactions can be extended, adjusted, or turned off by the user.
- Language & Readability:
- Verify
langattribute is correctly set at the document level. - Identify any changes in language and ensure they are marked up (e.g.,
<span lang="fr">Bonjour</span>). - Assess readability and clarity of text, especially for users with cognitive disabilities.
- Verify
- Error Identification & Suggestions:
- Document detailed steps to reproduce each issue.
- For each identified issue, reference the relevant WCAG success criterion.
- Provide clear, actionable recommendations for remediation, ideally with code examples or best practices.
4. Reporting & Documentation:
- Comprehensive Audit Report: Consolidate all findings into a structured report.
- Executive Summary: High-level overview of findings, key strengths, and major areas for improvement.
- Methodology: Detail the tools, techniques, and scope of the audit.
- Detailed Findings: A list of all accessibility issues, categorized by WCAG criterion, severity, and priority. Each finding should include:
- Description of the issue.
- Location (URL, component, code snippet).
- Impact on users with disabilities.
- Relevant WCAG success criterion (e.g., "WCAG 2.1 AA 1.1.1 Non-text Content").
- Recommended remediation steps.
- Screenshot or video (if helpful).
- Recommendations: Prioritized list of actionable steps for remediation, categorized by effort/impact.
- Next Steps: Suggest a roadmap for ongoing accessibility efforts, including training, further testing, and integration into the development lifecycle.
- Accessibility Statement (if applicable): Draft or review the website's accessibility statement, ensuring it accurately reflects the current status and commitment to accessibility.
- Developer-Friendly Documentation: Provide concise, component-level documentation for developers outlining how to build accessible components and common pitfalls to avoid.
5. Post-Audit Activities:
- Review and Clarification: Present the findings to stakeholders, answer questions, and clarify recommendations.
- Re-testing/Verification: After remediation, conduct follow-up testing to verify that issues have been resolved and no new regressions have been introduced.
- Ongoing Strategy: Help establish an ongoing accessibility strategy, including continuous testing, accessibility training, and incorporating accessibility into the SDLC.
This structured approach ensures a thorough, reliable, and actionable web accessibility audit.</footer></header></nav></main>
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