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How regulatory and compliance changes will impact the nonprofit sector

from  September 29, 2022 | 3 min read

There are big changes afoot when it comes to accounting regulations for the global nonprofit sector. A five-year project to develop more standardized international rules for charity accounting was launched in September 2019. The project, entitled International Financial Reporting for Non-Profit Organisations (IFR4NPO), is backed by the Chartered Institute of Public Finance and Accountancy (CIPFA) and Humentum, a global not-for-profit organization working with humanitarian and development organizations. A consultation on the issues involved ran from January to September 2021, and IFR4NPO has now published its summary of responses to the first part of the consultation.

Currently, there are no global standards for nonprofit organizations in place, and these changes could come into force as early as January 2024. However, organizations must review their capabilities to be prepared to meet these changing standards and prepare their teams to deliver on this requirement.

Greater Transparency

Charitable nonprofits embrace the values of accountability and transparency as a matter of ethical leadership, as well as legal compliance. Leaders of nonprofit organizations know that financial transparency will help preserve the important trust each donor places in an organization with each contribution. Additionally, conduct that is accountable and transparent earns employees' trust and creates a positive workplace culture.

The need for nonprofit financial transparency is greater than ever due to the upcoming increased scrutiny from regulators as well as public donations. It is essential that there is clarity around funding sources to actual program cost attribution. Transparency and accountability accompanied by good disclosure practices in financial management will give donors confidence that the funds they have contributed are being used to do good. It is crucial for charities to embrace and apply good governance practices to ensure that charitable assets and monies are well protected, managed, and accounted for.

What will be required?

  • Nonprofit organizations will need to demonstrate their ability to recover administration costs via direct charging against restricted funding agreements. The overall level of recovery of administration costs achieved by nonprofit organizations across all their restricted income will need to be clearly communicated.
  • All nonprofits should possess the technical proficiency needed in cost recovery practices, partly due to the importance of implementing proper costing methodologies that will enhance their strategic plans and sustainability. To achieve full cost recovery, nonprofits need to implement operating standards and instill professional ethics throughout their organization.
  • The application of tools and processes needed in good cost recovery practice, including cost categories, a cost recovery policy, knowledge of the organization’s administration cost rate, systems for developing and managing grant-funded budgets, and cost charging systems.

What tools and software solutions are available?

Investment in infrastructure is essential to the viability of a nonprofit’s programs in the long run. Such investments include money spent on more efficient information management systems, more highly skilled people, training, and program development initiatives.

A nonprofit’s annual report is a window into its financial and organizational health. It should include public legal disclosures as well as more detail on how donations are used. Annual reports also demonstrate transparency to board members and other stakeholders, so it is essential that nonprofits harness the power of digital solutions that allow transparency and accountability.

Financial Planning and Analysis (FP&A) solutions are more strategic, giving a forward view of organizational management. The strategic view links systems and data across the organization and can be used for planning, budgeting, forecasting with dashboarding, and analytics. FP&A helps formulate the organization's long-term direction, allows more impactful decision-making, maximizes available funding, and assists with the allocation of resources and expenses, as well as analyzing recent performance to projections. 

Enterprise Resource Planning (ERP) is a system that enables a static record of transaction for nonprofit activities to be recorded while also allowing a retrospective view of specific departments and functions. ERP is both operational and tactical in nature, with purpose-built solutions that transform work, so the people working in nonprofit organizations gain the time and flexibility to focus on achieving their mission.

ERP solutions can be used for activities such as sales orders, account reconciliations, procurement, and invoicing, simplifying complex processes to give a better understanding of finances, cash flow, and expenses.

When FP&A and ERP are linked together, they combine value from purely transactional to more strategic. And the single source of data truth dramatically improves transparency, visibility, and accountability. Your nonprofit organization will be able to improve:

  • Integrated financial planning by consolidating and validating disparate data from different sources.
  • Reporting, analysis, and dashboarding through viewing numbers from different angles, helping enhance visibility and transparency
  • Financial consolidation by quickly and easily consolidating financial data in one connected system. Complex accounting standards, currencies, and transactions can be easier linked. This consistency helps consolidators, auditors, and those in leadership roles.

How Unit4 can help your organization

With Unit4’s ERP and FP&A software systems, you can adapt and optimize how your people work to help you manage complexity and focus on the things that matter. Unit4’s next-generation smart ERP software solutions are built for people in the business of helping people. With us, you can ‘Experience Real Purpose’ with an adaptable solution that’s right for you, now and in the future. We can help you quickly and easily consolidate financial data, carry out group reporting and connect everybody in one single system.

To discover more, click here to book a demo and see what our ERP and FP&A solutions can do for your nonprofit organization yourself.

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