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Financial Reporting For Nonprofit Organisations: A Guide

Nonprofit organisations are required, by law, to prepare certain financial reports every year in order to comply with accounting standards. Financial reporting is an opportunity for charities to share their activities and financial position.
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Whilst providing financial reports might seem like an onerous task for smaller charities, it can help your organisation run more efficiently with clear financial direction and records. Managing finances well is key to the success of any business, including nonprofits. 

With nonprofit accounting rules differing from regular businesses, it can be challenging to understand what’s expected. This guide shares the ins and outs of charity financial reporting to ensure that you’re compliant.

Are there financial reporting requirements for nonprofits? 

There are legal financial reporting requirements for nonprofits, designed to keep track of where income is being spent. Not only is this a legal requirement, but it can also provide reassurance to donors, encouraging them to provide more support when they can see where the money is being spent and that it’s benefitting the intended cause. 

Nonprofit organisations are required, by law, to provide a trustees’ annual report every year. The purpose of this report is to provide insight into a charity’s activities and financial position. This is not only for accounting purposes, but also to give funding bodies a view into where charitable contributions are being spent. All charities must also prepare annual accounts and keep accounting records up to date.

However, these financial reporting requirements aren’t always successfully met, with the Charity Commission for England and Wales finding that only 55% of accounts were of acceptable quality when examining a sample. This is where charity accounting software can be hugely beneficial as it keeps track of your financials throughout the year, making it much easier to pull together accurate financial reports when required. This can provide peace of mind throughout the year that accounts are taken care of.

Which charities are required to produce financial reports? 

All charities are required to report their income and expenditure every year: to keep accounts updated and inform the general public and funding bodies of their work throughout the year. However, as a nonprofit organisation’s income increases, more financial reports are required in order to keep track of finances.

Below are the requirements for the different income bands:

Under £10,000

  • Trustees’ annual report
  • Income and expenditure

£10,000 - £25,000

  • Trustees’ annual report
  • Income and expenditure
  • Include answers to questions about your charity

Over £25,000

  • Trustees’ annual report
  • Income and expenditure
  • Answer questions
  • Get accounts checked
  • Independent examiner’s report

Over £1m

  • Full independent audit

What are the main financial statements used in nonprofit organisation reports? 

Nonprofit organisations must provide certain financial statements, which can differ from standard business accounting:

  • Statement of financial position — this is essentially a nonprofit’s balance sheet, representing the financial health of the organisation. 
  • Statement of activities — this income statement reflects a nonprofit’s income and expenses. 
  • Statement of functional expenses — this breaks down expenses into categories by nature and function.
  • Statement of cash flow — reports on how cash moves within the organisation when it’s going both in and out of the nonprofit.

Things could be set to change thanks to the International Financial Reporting For Non Profit Organisations (IFR4NPO). Future financial reporting standards could look very different with the IFR4NPO aiming to develop internationally applicable financial reporting standards for nonprofits. This will result in consistent standards across all nonprofit organisations internationally, making it much easier to remain uniform with financial reporting standards. 

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