Accounting for European Non-Governmental Organizations (NGOs) and Charities

NGOs and charities are required to keep accurate financial records and to produce annual financial statements. These statements should be prepared in accordance with generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS).

The financial statements for an NGO or charity should include the following:

• A balance sheet, which shows the organization’s assets, liabilities, and equity at a specific point in time.
• An income statement, which shows the organization’s income and expenses for a specific period of time.
• A cash flow statement, which shows the organization’s sources and uses of cash for a specific period of time.
• Notes to the financial statements, which provide additional information about the organization’s financial position and performance.

In addition to the financial statements, NGOs and charities may also be required to produce a number of other reports, such as:

• An annual report, which provides a general overview of the organization’s activities and financial performance.
• A report on the use of donated funds, which must be provided to donors who contribute more than a certain amount of money.
• A report on the organization’s compliance with applicable laws and regulations.

The specific requirements for accounting for NGOs and charities vary from country to country. It is important to consult with a qualified accountant to ensure that the organization is complying with all applicable laws and regulations.

NGOs and charities that are looking to improve their accounting practices:

• Use a qualified accountant: A qualified accountant can help you to ensure that your financial records are accurate and that your financial statements are prepared in accordance with applicable laws and regulations.
• Implement a system of internal controls: A system of internal controls can help to prevent fraud and errors.
• Keep accurate records: Accurate financial records are essential for the preparation of accurate financial statements.
• Produce regular financial statements: Regular financial statements can help you to track your organization’s financial performance and to identify any potential problems.
• Disclose information to donors: Donors have a right to know how their money is being used. Make sure that you are providing them with accurate and timely information about your organization’s financial performance.

Some key aspects to consider:

• Regulatory Compliance: Understand the legal and regulatory framework governing NGOs and charities in the European Union (EU). Familiarize yourself with the specific reporting, accounting, and governance requirements imposed by the EU directives and national legislation in the country where your organization operates.
• Financial Reporting Standards: Follow the applicable financial reporting standards for NGOs and charities. In the EU, organizations typically adhere to the International Financial Reporting Standards (IFRS) or the European Financial Reporting Advisory Group (EFRAG) endorsement of International Public Sector Accounting Standards (IPSAS). These standards provide guidance on the recognition, measurement, and presentation of financial information for non-profit organizations.
• Chart of Accounts: Develop a chart of accounts that aligns with the specific reporting needs of NGOs and charities. Include appropriate categories to track income, expenses, assets, liabilities, and fund balances. Consider separate accounts for restricted funds, grants, and donations to ensure proper tracking and reporting of restricted funds.
• Fund Accounting: Adopt a fund accounting system to track financial activities by specific funds or projects. NGOs and charities often receive funding from various sources, including grants, donations, and government contracts, which need to be properly accounted for and reported separately. Implement internal controls to ensure proper stewardship and use of funds.
• Income Recognition: Properly account for different sources of income, including donations, grants, fundraising activities, and program service revenue. Ensure compliance with accounting principles regarding revenue recognition, especially when dealing with restricted funds or multi-year grants that require tracking over specific periods.
• Expense Allocation: Allocate expenses accurately to different programs, projects, or functional areas. Use cost allocation methods that reflect the actual usage of resources and align with the nature of the organization’s activities. Ensure transparency and accountability in reporting how funds are utilized.
• Tax Compliance: Understand the tax implications and exemptions available for NGOs and charities in the EU member state where your organization operates. NGOs and charities may be eligible for tax benefits, exemptions, or reduced rates on income, donations, or property. Seek professional advice to ensure compliance with tax regulations and take advantage of available tax incentives.
• Donor Reporting: NGOs and charities often have reporting obligations to their donors, especially when funds are received for specific projects or grants. Develop systems and procedures to provide accurate and timely reports to donors, demonstrating how their funds have been used and the impact achieved.
• Internal Controls: Establish robust internal control systems to ensure transparency, accountability, and proper financial management. Implement procedures for financial approvals, segregation of duties, financial oversight, and risk management. Regularly assess and strengthen internal controls to mitigate the risk of fraud or financial mismanagement.
• Auditing and Transparency: Conduct regular financial audits to provide assurance to stakeholders and donors regarding the financial integrity of the organization. Publish annual financial reports, including audited financial statements, to demonstrate transparency and accountability to the public, donors, and regulatory authorities.
• Grant and Project Accounting: NGOs and charities often receive grants and funding for specific projects or programs. Implement effective grant and project accounting practices to track the inflows and outflows of funds related to each grant or project. This includes monitoring expenses, reporting on project progress, and ensuring compliance with grant requirements.
• Donor Management: Maintain a comprehensive donor management system to track and record donations, pledges, and other contributions. This system should capture donor information, donation amounts, donation types (cash, in-kind, etc.), and any restrictions or designations specified by donors. Regularly acknowledge and express gratitude to donors for their support.
• Restricted and Unrestricted Funds: NGOs and charities often have both restricted and unrestricted funds. Clearly distinguish between these funds in the financial statements and ensure that funds are used in accordance with donor restrictions or organizational policies. Implement appropriate internal controls to prevent the unauthorized use of restricted funds.
• In-Kind Donations: Non-monetary contributions, such as goods or services, are common in the nonprofit sector. Develop policies and procedures to appropriately value and account for in-kind donations. Determine fair value based on market prices or industry standards, and record these contributions as both income and related expenses, if applicable.
• Fundraising Events: If your organization conducts fundraising events, ensure proper accounting for the revenue and expenses associated with these events. Track event-related costs, such as venue rental, catering, and marketing, and allocate them appropriately. Report the net proceeds from fundraising events separately in financial statements.
• VAT and Tax Exemptions: NGOs and charities may be eligible for VAT exemptions or reduced rates on certain goods and services. Understand the VAT regulations in the EU country where your organization operates and ensure compliance with any applicable exemptions or reporting requirements. Familiarize yourself with tax incentives and exemptions available for nonprofit organizations.
• Reporting to Regulatory Authorities: Comply with the reporting requirements of the regulatory authorities in your country. This may include filing annual reports, financial statements, or other documentation. Ensure timely submission of these reports to maintain good standing with the regulatory authorities and demonstrate transparency to stakeholders.
• Governance and Oversight: Establish effective governance structures and processes within your organization. This includes having a competent board of directors or trustees, implementing appropriate financial controls, and conducting regular internal audits. Ensure that the organization’s activities align with its mission and comply with legal and ethical standards.
• External Audit: Consider engaging an independent external auditor to perform an audit of your organization’s financial statements. An external audit provides an objective assessment of your financial records, helps ensure accuracy and compliance, and enhances credibility with donors and stakeholders.
• Technology and Accounting Systems: Leverage technology and accounting software to streamline financial processes, improve accuracy, and enhance reporting capabilities. Implement a robust accounting system that meets the specific needs of NGOs and charities, including features for fund accounting, grant management, and donor tracking.